3i Group plc
Annual report
and accounts 2016
In this report
Overview
2016 Introduction
Key performance highlights
Chairman’s statement
Strategic report
Chief Executive’s review
What we do
How we create value
Our strategic objectives
Key performance indicators
Business review
Private Equity
Infrastructure
Debt Management
Risk management
Principal risks and mitigations
Financial review
Investment basis
Reconciliation of Investment basis to IFRS
Corporate responsibility
Corporate Governance
Chairman’s introduction
Board of Directors and Executive Committee
The role of the Board
Statutory and corporate governance information
Corporate Governance statement
Nominations Committee report
Audit and Compliance Committee report
Valuations Committee report
Directors’ remuneration report
Audited financial statements
Consolidated statement of comprehensive income
Consolidated statement of financial position
Consolidated statement of changes in equity
Consolidated cash flow statement
Company statement of financial position
Company statement of changes in equity
Company cash flow statement
Significant accounting policies
Notes to the accounts
Independent Auditor’s report
Portfolio and other information
25 Large investments
Portfolio valuation – an explanation
Information for shareholders
Glossary
01–03
01
02
03
04–56
04
10
12
14
16
18
18
23
25
27
30
36
45
48
53
57–92
57
58
60
63
67
74
75
79
82
93–145
93
94
95
96
97
98
99
100
103
140
146–155
146
148
150
152
Corporate website
For more information on 3i’s business, its portfolio
and the latest news, please visit
www.3i.com
Cover photographs
Top left image: Esvagt
Top right image: Euro-Diesel
Bottom image: Audley Travel
For definitions of our financial terms,
used throughout this report,
please see our glossary on pages
152 to 155.
The financial data presented in the Overview
and Strategic report is taken from the Investment
basis financial statements. The Investment basis
(which is unaudited) is described on page 48 and
the differences from, and the reconciliation to, the
IFRS Audited financial statements are detailed on
pages 49 to 52.
Disclaimer
The Annual report and accounts have been prepared solely to
provide information to shareholders. They should not be relied
on by any other party or for any other purpose.
The Strategic report on pages 4 to 56, the Directors’ report on
pages 57 to 81, and the Directors’ remuneration report on pages
82 to 92 have been drawn up and presented in accordance with
and in reliance upon English company law and the liabilities of the
Directors in connection with those reports shall be subject to the
limitations and restrictions provided by that law.
This Annual report may contain statements about the future,
including certain statements about the future outlook for 3i Group
plc and its subsidiaries (“3i”). These are not guarantees of future
performance and will not be updated. Although we believe our
expectations are based on reasonable assumptions, any statements
about the future outlook may be influenced by factors that could
cause actual outcomes and results to be materially different.
Overview
2016 Introduction
3i Group Annual report and accounts 2016
01
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
As a result of our three-year
transformation 3i is now a stronger
company, both commercially
and financially.
Our 2016 results demonstrate our
continued momentum and potential
for resilient performance through
the economic cycle.
Looking forward, our network and
investment discipline underpin our
ability to continue to deliver attractive
returns for shareholders.
Private Equity
Infrastructure
Debt Management
1
2
3
4
5
What we do
3i is an investment company with three
complementary businesses, Private Equity,
Infrastructure and Debt Management,
specialising in core investment markets
in northern Europe and North America.
Business model and strategy
3i is a diversified investor with disciplined
and consistent investment processes.
This, together with our proprietary and
third-party capital, supports our objective
to deliver good returns through the cycle.
For further information, please see
p10
3i Group Annual report and accounts 2016
02
Overview
Key performance highlights
for the year to 31 March 2016
Total return on equity
NAV per share
22%
(2015: 20%)
463p
(2015: 396p)
Full year dividend per share
Operating cash profit
22p
(2015: 20p)
£37m
(2015: £28m)
Private Equity realisation proceeds
Private Equity cash invested
£743m
(2015: £831m)
£365m
(2015: £369m)
Infrastructure realisation proceeds
Infrastructure operating cash income
£51m
(2015: £10m)
£49m
(2015: £47m)
Debt Management AUM raised
Debt Management fee income
£1.5bn
(2015: £2.4bn)
£38m
(2015: £34m)
Read more about our financial performance
p36
Chairman’s statement
3i Group Annual report and accounts 2016
03
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
“ 2016 has delivered another robust
result which demonstrates the value
of our clear, consistent strategy and
disciplined approach to investment.”
Overview
In my first year as Chairman, I am pleased to report that 3i
delivered another robust result. The Group has a clear, consistent
strategy and Simon Borrows and the team continue to make
excellent progress in positioning 3i as a business capable of
delivering attractive returns throughout the economic cycle.
Market environment
2015 was marked by considerable turbulence in global markets
and growth indicators in the US and Europe remained under
pressure. As a consequence, central bank monetary policy
continued to be supportive across all the major developed
economies with interest rates remaining at historic lows. 3i has
limited direct exposure to companies in the most challenged
sectors and our portfolio performed well, with our largest and
strongest investments, including Action, Scandlines and
3i Infrastructure plc, delivering strong year-on-year
improvements in performance.
Performance and dividend
In FY2016, total return increased by 25% to £824 million
(2015: £659 million). Net asset value increased to 463 pence
per share (31 March 2015: 396 pence) and return on opening
shareholders’ funds was 21.7% (2015: 19.9%). We remained net
divestors during FY2016 and ended the year with a net cash
position of £165 million and available liquidity of £1,352 million
(31 March 2015: net cash of £49 million and liquidity of
£1,214 million). In light of this strong performance, the Board
has recommended a final dividend of 16 pence per share (2015:
14 pence per share), resulting in a full year dividend of 22 pence
per share (2015: 20 pence per share), equivalent to 27% of cash
realisation proceeds (2015: 23%). This reflects the Board’s
continuing confidence in both the Group’s future prospects and
its cash generation capability. Subject to shareholder approval,
we will pay the final dividend of 16 pence (2015: 14 pence) in
July 2016.
Our current dividend policy, set in May 2012, contemplates
distributions of between 15–20% of cash realisation proceeds
(subject to certain criteria on gross debt and gearing described
below) with a minimum dividend of 8.1 pence per year. As a result
of the Group’s strong performance and conservative balance
sheet strategy, actual dividends have exceeded 20% of realised
proceeds in each of the years the policy has been in operation.
In light of the Group’s continued progress in executing its
strategy, the quality of its investment portfolio and forecast
realisation pipeline, the Board has decided that with effect from
FY2017, the base dividend will increase to 16 pence per annum,
with an additional final dividend each year taking account of cash
realisations, the investment pipeline and the balance sheet at
year end. Consistent with our conservative approach, we will
maintain our criteria of only paying an additional final dividend
provided gross debt is less than £1 billion and gearing is less than
20%, but do not expect this to be a practical constraint. Further
detail on the Group’s approach to capital allocation is provided
in the Chief Executive’s review.
Outlook
The combination of continuing market volatility and the upcoming
Brexit referendum is likely to weigh on investor sentiment, with
reduced M&A volumes and delays in capital investment likely
to persist while the uncertainty remains. However, I believe that
3i’s proprietary capital, selective investment approach and
balance sheet strength positions the Group well to deal with
these uncertain economic and financial conditions. A clear,
consistent strategy and disciplined approach to investment
underpin our confidence in the future success of the Group.
Simon Thompson
Chairman
04
3i Group Annual report and accounts 2016
Strategic report
Chief Executive’s review
We have continued to execute our
well established strategy, making good
progress against our key performance
indicators, with all three of our
businesses building on the momentum
seen in previous years. 3i generated
an excellent total return on opening
shareholders’ funds of 21.7%
(2015: 19.9%) and a NAV per share of
463 pence (31 March 2015: 396 pence).
This year’s financial and operational
performance, against a backdrop
of volatile market sentiment,
demonstrates the depth of the
Group’s investment capabilities and
potential to generate attractive returns
for investors through the cycle.
“ 2016 was another strong year for 3i
and built on the success of our recent
restructuring. The Group’s performance
has been resilient in the face of
challenging macro-economic conditions
and volatile markets.”
Another year of resilient financial performance
Private Equity had an excellent year, generating a gross
investment return of £1,011 million, or 32% of opening value
(2015: £719 million, 24%). This reflects strong performance
from our larger investments, particularly Action, Basic-Fit
and Scandlines.
Action, the leading non-food discounter in continental Europe,
had another outstanding year with a 36% increase in EBITDA and
like-for-like sales growth of 7.6%. Action continued its successful
store roll-out programme, opening 141 net new stores in the year,
and at the end of 2015 had 655 stores in six countries (with a total
of 410 opened since our investment in 2011). Action’s international
expansion has been a key driver of its success to date, with
France and Germany now the main markets for growth.
In addition, Action entered Austria and Luxembourg in 2015;
early progress is encouraging and provides further evidence that
Action’s store concept travels well across borders. To enhance
Action’s international growth plans, a third distribution centre
opened north of Paris in early 2016 and a fourth and fifth are
planned for Toulouse and Mannheim respectively. 2016 promises
to be another strong year for Action as it plans to open more
stores than last year. We acquired Action in 2011 as a Benelux
retailer but in 2015, Action opened more stores in France and
Germany than in the Benelux and it has now become a truly
pan-European retailer.
I joined the Board of Peer Holding BV, Action’s parent company,
last year in recognition of the importance of this investment to
3i and in order to foster closer links between the two groups.
Scandlines, a large ferry operator with two high frequency, large
capacity routes between Germany and Denmark, continues to
perform well due to strong volume growth and a shift in mix
towards higher margin booking classes. The Danish Transport
Ministry has confirmed that the opening date of a competing
tunnel, the Fehmarn Belt Fixed Link, on Scandlines’ key route
between Rødby and Puttgarden will be delayed further, which
is an important development for Scandlines.
3i Group Annual report and accounts 2016
05
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Action completed a £1.2 billion senior debt refinancing, despite
deteriorating conditions in the debt markets, in February 2016.
Action’s performance and strong cash generation meant it had
been able to de-lever rapidly since its prior refinancing in 2015.
Such is the strength of the Action proposition that we have already
returned a 3.5x euro cash multiple on our original investment
without reducing our equity ownership. This transaction
contributed £168 million to the £185 million of realisations
received from refinancings this year.
We closed the year with a strong realisation pipeline and post year
end we announced the disposal of Amor, the market leader for
medium price jewellery in Germany, for estimated proceeds of
£89 million and 2.5x original euro cost (2.3x in sterling) as well as
Mayborn, owner of the Tommee Tippee baby products brand,
for £135 million (3.5x).
We have maintained the investment momentum seen in FY2015.
In a competitive market, our pricing discipline is paramount but
we were nevertheless able to secure three interesting new
investment opportunities through careful and well managed
processes. We invested £406 million (of which £365 million was
3i Group proprietary capital) in Weener Plastic Packaging Group
(“Weener Plastic”), Euro-Diesel and Audley Travel as well as a
further investment in ATESTEO (formerly known as GIF) through
the buyout of the founding family’s remaining interest. Further
details on the new investments can be found on pages 18 and 19.
The number of portfolio companies in Private Equity was 47
unquoted assets and five quoted stakes at 31 March 2016
(31 March 2015: 61 unquoted assets and four quoted stakes)
and we remain on target to meet our medium-term objective
of holding 30–40 Private Equity assets.
Finally, we reached an important milestone at 31 March 2016 with
the accounting recognition of carry receivable for Eurofund V.
This is an excellent achievement as the fund performance has
recovered from a low point of 0.6x in 2009 to 1.7x at 31 March 2016.
The Infrastructure team built on FY2015’s excellent performance
and its core portfolio of European economic infrastructure assets
continues to perform well and underpins good levels of income
for the Group. The business generated cash income of £49 million
(2015: £47 million) through its fund advisory and management
activities and dividend income from 3i Infrastructure plc (“3iN”).
The good portfolio performance also resulted in a NAV based
performance fee for 3i of £20 million (2015: £45 million). In
addition, 3i received a special dividend of £51 million (2015: nil)
from 3iN following its sale of Eversholt Rail.
Positive momentum continues at Basic-Fit, the leading discount
fitness operator in continental Europe, with very good earnings
growth and ongoing capital investment to upgrade its existing
gym portfolio and open new units. Basic-Fit is now Europe’s
largest discount gym chain and had 351 gyms and 1.1 million
members at 31 March 2016. It is another pan-European business,
growing strongly in France and Spain, having established market
leadership in the Netherlands and Belgium. On 17 May 2016,
Basic-Fit announced its intention to launch an Initial Public
Offering and Listing on Euronext Amsterdam.
The wider portfolio continues to perform well, notwithstanding
the slowing macro-economic conditions, with encouraging
performance from some of our newer investments. Our decision
in 2012 to focus our Private Equity resources on core sectors
and geographies has limited the negative impact from broader
geo-political and economic concerns. Our monthly portfolio
monitoring means that potential issues are highlighted early and
any remedial actions put in place promptly. However, we cannot
be immune to issues in the markets in which we operate. In
particular, the impact of the lower oil price on the wider energy
and industrial sectors has impacted our investments in JMJ and
Dynatect. Reduced capital expenditure by oil and gas companies
has continued to affect JMJ, which provides consultancy services
to the sector. It has also had a negative effect on Dynatect,
a specialist provider of protection equipment. Dynatect has a
number of large customers which supply the capital goods sector,
including oil and gas, in the US and suffered from reduced orders
in 2015. Foreign exchange volatility has also hindered trading for
a number of our companies and the decline in Russian consumer
spending has had a negative impact on trading at our lingerie
retailer, Agent Provocateur. However, the portfolio is performing
well overall, with only a small minority of our investments seeing
earnings decline in 2015. Value weighted earnings increased by
17% (2015: 19%) over the year.
The flow of realisations has continued and Private Equity realised
total proceeds of £743 million (2015: £831 million). A supportive
market for realisations in the first half of our financial year meant
that we continued to make good progress in reshaping our
portfolio. In total we disposed of 11 smaller or older assets in
the year which freed up investment executive time to focus on
origination and managing and ultimately maximising value in
our stronger assets.
As we noted at the half-year, we have reached a point in the
evolution of the portfolio where more of our realisations will
come from our stronger assets. Despite a more challenging
macro-economic environment for realisations in the second half
of FY2016, we sold Element Materials Technology (“Element”),
one of our largest and highest growth investments. Under 3i’s
ownership, Element completed and successfully integrated
10 acquisitions which also delivered an increase in EBITDA
margin from 16% to 26%. As a result, revenue nearly trebled
to c.US$290 million and EBITDA quadrupled to US$80 million.
Total cash proceeds to 3i on the sale were £188 million with
a money multiple of 3.9x (4.5x in euro). In total, cash returns
were £217 million, including the refinancing completed in 2014.
This was an excellent result and all credit to the management
team at Element as well as our own Private Equity team.
06
3i Group Annual report and accounts 2016
Strategic report
Chief Executive’s review
Against a backdrop of intense competition for infrastructure
assets, and particularly for large core economic infrastructure
assets, the team advised 3iN on a revised return target,
announced in May 2015, and changed their investment focus
towards mid-market economic infrastructure businesses and
primary PPP and low-risk energy projects, which offer more
attractive risk-adjusted returns. The new leadership team has
made a number of senior hires, including a new origination
partner, to support the strategic development and momentum
of the business. The change in focus and high level recruitment
has led to a material increase in origination activity. Infrastructure
announced the completion of four new investments (two further
terminals alongside Oiltanking, ESVAGT, the West of Duddon
Sands Offshore Transmission Owner and a French PPP investment
in Condorcet Campus) totalling £193 million in the year. 3iN also
announced a £75 million investment in Wireless Infrastructure
Group and a c.£154 million investment in TCR, Europe’s largest
independent asset owner of airport ground support equipment,
in April 2016.
The success of the new investment strategy led to 3iN’s
announcement on 12 May 2016 of its intention to raise new
equity of up to £350 million to fund new investments and its
future pipeline. We have indicated our intention to support the
transaction, and maintain our 34% interest in 3iN.
The Debt Management business had a successful year of fund
raising in Europe and the US and AUM increased to £8.1 billion
(31 March 2015: £7.2 billion). We closed four CLOs in the year,
raising AUM of £1.3 billion (2015: £2.2 billion) of CLO AUM before
negative investor sentiment around oil and gas, commodities and
utilities effectively closed the US CLO market between January
and March 2016. The European market, which generally has less
exposure to these sectors, was impacted to a lesser degree,
although it was effectively also closed for part of calendar Q1
2016. This market volatility has reduced the mark to market
valuation of our CLO portfolio but, as long-term holders of CLO
equity, our returns are ultimately driven by the cash flows, rather
than short-term unrealised fair value movements.
The team continued to make important progress in diversifying
the business and launched an open-ended senior debt fund,
the Global Income Fund, with US$75 million of seed money
from 3i. Both the Global Income Fund and the US Senior Loan
Fund outperformed their benchmarks in the year. In total,
Debt Management contributed £38 million of fee income
(2015: £34 million) to the Group during the year.
One of the key components of our improved financial
performance and resilience since 2012 has been a disciplined
control over operating expenses. Although we have recruited
selectively within our Private Equity and Infrastructure teams to
support origination and business development activity, costs
remain tightly controlled at 1% of AUM (2015: 1%). Cash income
increased by 8% to £171 million (2015: £158 million) due to fee
income and distributions from our three businesses. As a result,
operating cash profit increased to £37 million (2015: £28 million).
Fragile market conditions create challenges
and opportunities
Throughout FY2016, we operated through periods of significant
economic, financial and geo-political volatility driven by concerns
about Chinese growth and the significant falls in oil and
commodity prices. Although the triggering events may change,
we expect this volatility to continue to be a feature throughout
FY2017 and beyond. This uncertainty is reducing M&A volumes
and creates volatility in thin equity markets. Nevertheless,
the private equity sector raised over $500 billion of new funds,
increasing uninvested capital, or “dry powder”, to a record level
of $1.3 trillion in 2015 (source: Bain & Company Inc.).
In our Private Equity business, our systematic approach to
planning for realisations allows us to be well prepared to maximise
value in competitive processes and through the IPO market when
conditions allow. The same factors drive our emphasis on the
need to remain selective in making new investments. Our strategy
of maintaining long-standing geographic teams with strong local
relationships means we can often originate investments outside
competitive processes and differentiate ourselves with
management teams.
As we do not have the pressure of a future third-party fund
mandate and timeline, we can step away from aggressive
processes but act with flexibility and speed using our proprietary
capital when suitable opportunities that meet our strict
investment criteria arise. For example, in December 2015, we were
able to move rapidly to secure the acquisition of Audley Travel
by using the Group’s strong balance sheet to underwrite the
debt as well as provide the equity for this fast growing business.
After securing the acquisition, we refinanced the debt facilities
with a consortium of banks in January 2016.
Finally, our monthly portfolio monitoring process allows us to
react promptly and decisively to indications that the wider market
uncertainty is having a more direct effect on individual investment
strategies, as it is bound to do given current weak growth in
many sectors and geographies. This does not mean we can be
completely immune to the markets in which we operate, but it
substantially reduces the risk of material and realised losses that
were a feature of 3i’s past.
Our Infrastructure team has responded to the low yield
environment by resetting its investment strategy away from the
larger infrastructure assets and projects, which are attracting
investors with lower return expectations. This has created a
much more active pipeline of investment opportunities.
Debt Management maintains an active trading approach to the
underlying credit investments in its funds to minimise the risk of
defaults. This, in turn, reinforces its successful credit management
track record to support future fund raising.
3i Group Annual report and accounts 2016
07
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Cash generation and usage
Average over FY10–FY12
£1,031m
27%
41%
Year to 31 March 2016
£967m
13%
6%
20%
61%
3%
29%
Realisations/
Fees and
portfolio
income
Operating costs,
net carried
interest
and tax
Debt
repayment
and interest
costs
Shareholder
distributions
Funds to
invest
Realisations/
Fees and
portfolio
income
Operating costs,
net carried
interest
and tax
Debt
repayment
and interest
costs
Shareholder
distributions
Funds to
invest
Well positioned to deliver good returns
to shareholders
We are navigating these challenging market conditions with
a conservative and well-funded balance sheet. Our capital
allocation approach is unchanged since we announced our
strategy in 2012 and the progress we have made in how we
use our cash can be seen in the charts above.
The majority of our proprietary capital (83%) is invested in Private
Equity. Our planned rate of new investment in Private Equity
remains €500–€750 million in four to seven investments per
annum. After allowing for this, we expect to remain a significant
net divestor throughout the next five years, through a combination
of re-shaping the portfolio and, more fundamentally, achieving
our objective of generating at least a 2x money multiple on
new investments.
We ended the year with a healthy cash position, out of which we
will repay the 2017 €331 million bond (2016: £262 million) which
matures on 17 March 2017. As we announced separately today,
we intend to buy back the bond early to the extent there is
investor appetite to do so. We also intend to support 3iN’s
equity fund raising.
In recognition of this year’s strong performance, we have
announced an increased total dividend for FY2016 of 22 pence
per share (2015: 20 pence per share) and our strong balance
sheet and capital allocation approach underpins the enhancement
of our dividend policy going forward as set out in the
Chairman’s statement.
08
3i Group Annual report and accounts 2016
Strategic report
Chief Executive’s review
Outlook
Our restructuring and simplified strategy has re-established
3i as a more resilient business both commercially and financially.
This clear and consistent approach with its emphasis on active
asset management, cash generation and cost control has
demonstrated its value over the last 12 months as macro-
economic pressures and volatile debt and equity markets
dampened market sentiment and challenged individual
businesses. As an investment company, we also face the continual
increase in financial and governance regulation which is often not
appropriate for our specific circumstances and which inevitably
leads to further cost and complexity for the Group.
We enter our new financial year with those challenging conditions
still in place, but we remain confident that we can deliver another
resilient performance. We must maintain our price and cost
discipline and use the sector and geographic capabilities within
our investment platforms to produce consistently strong returns
for our shareholders and investment partners. This approach,
along with our strong balance sheet and a proprietorial focus,
gives us a fundamental competitive advantage in mid-market
private equity and infrastructure investment and underpins our
confidence in producing attractive financial returns. The mid-market
is limited in the scale of opportunity within it but the breadth of
our international platform and the long-term nature of our
proprietary capital make 3i an attractive partner for management
teams compared to many of our fund-financed competitors.
This was an excellent year for the Group and I would like to thank
the 3i team for their good work and rigour. Our disciplined
approach, capable investment and management teams and
strong balance sheet underpin our objective of delivering mid
to high-teens returns to shareholders, accompanied by attractive
cash distributions.
Simon Borrows
Chief Executive
3i Group Annual report and accounts 2016
09
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Action highlights
Since its establishment in 1993, Benelux-based Action has grown into the
leading European non-food discount retailer with more than 650 stores in
six countries and over 29,000 employees. This compares to 245 stores across
the Benelux and Germany and more than 7,000 employees when 3i and
Funds invested in the business in June 2011. EBITDA has almost tripled
from €77 million in 2010 to €226 million in 2015. The business now
generates revenues of c.€2.0 billion per annum, up from €600 million.
The majority of sales are now outside Action’s home country.
Action’s business model differs from that of more traditional retailers
because only a third of articles are part of its standard range. Large-scale
procurement, optimal distribution and a cost-conscious corporate culture
ensure very low prices. Action was voted European Retailer of the Year
for the second consecutive year in 2015.
Number of stores
655
514
324
341
406
303
321
262
Netherlands
Other countries
127
122
149
140
170
158
105
190
175
220
198
245
218
269
235
1
1993
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Direct Asian
sourcing
International growth
across 6 countries
International
organisational set up
Distribution centres
Planned distribution centres
Store operations
10
3i Group Annual report and accounts 2016
Strategic report
What we do
3i is an investment company with three complementary
businesses, Private Equity, Infrastructure and Debt
Management, specialising in core investment markets
in northern Europe and North America.
Our business
Activity
Investments
Private Equity
– Investment and asset management
to generate capital returns
– Investments typically with an Enterprise
Value of €100m–€500m at acquisition
in our core investment markets of
northern Europe and North America
– Focused on Consumer, Industrial
and Business Services sectors
unquoted assets
47
5
quoted stakes
Infrastructure
– Investment and asset management
to generate capital returns and cash
income
– Invest and manage a portfolio of
mid-market economic infrastructure
businesses, and greenfield and low-risk
energy projects
– Invest in developed markets, with a focus
on the UK and Europe
34%
holding in 3iN
Debt
Management
– Fund management and investment
to generate recurring cash income
– Launch and manage CLO funds in
North America and Europe with an
approximate size of US$500m/€400m
– Develop and manage senior debt funds
that invest in North America and Europe
– Invest in CLO equity and seed capital in
senior debt funds
in 24 CLO equity investments
£151m
£58m
seed capital in two senior
debt funds
3i Group Annual report and accounts 2016
11
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Read more about
Private Equity
p18
Read more about
Infrastructure
p23
Read more about
Debt Management
p25
What we do
– Our local teams identify investment
opportunities in businesses with
international growth potential across
our core sectors
– Through our international network
and our active partnership approach,
drawing on our network of specialist
business leaders, we support
management teams to achieve
the full potential of their businesses
Proprietary Capital value
£3.7bn
€6.8bn
3i and Funds value
– We advise 3iN on originating and
investing in opportunities in its
target sectors
– We manage funds and other third-party
capital in complementary sectors,
including PPP and infrastructure
– We implement our investment approach
through a team of investment
professionals based in London and
Paris, as well as 3i’s wider network
of offices
£527m
Proprietary Capital value
£2.4bn
AUM
– The team manages portfolios of
assets from offices in London and
New York
– Our core objective is to achieve
consistent out performance for debt
investors through active portfolio
management
– Active trading of credit investments
Proprietary Capital value
£229m
$11.6bn
AUM
12
3i Group Annual report and accounts 2016
Strategic report
How we create value
Our business model
3i’s expertise and proprietary capital differentiates
its investment proposition and underpins its capability
to deliver growth and returns for shareholders.
1
2
Our resources
and relationships
Identify and invest in assets that
will meet our return objectives
Expert people
Our investment professionals have deep
sector knowledge in their core markets.
We are committed to offering our people
the best training and development
opportunities to ensure that they can
operate at the highest level.
Network
Essential to support our businesses,
we have a well-developed network of
business leaders across our chosen
markets. Together they assist us to identify
opportunities and carry out due diligence,
as well as being invaluable to the
management of our investee companies.
Strong balance sheet and proprietary
capital investment capability
Our strong balance sheet allows us the
flexibility to invest in Private Equity and
Infrastructure opportunities as well as to
support regulatory capital requirements
and business development opportunities
in Debt Management.
Reputation
An investment company, established for
over 70 years, listed on the London Stock
Exchange and a member of the FTSE 100.
A disciplined
approach to investing
underpins our returns
Private Equity
Grow portfolio
earnings
Realisations at
2x cash-to-cash
multiples
Infrastructure
Cash income
and capital returns
from 3iN
83%
17%
12%
35%
3i Group Proprietary capital portfolio value
3i Group Proprietary capital portfolio value
3i Group Fund management fee income
3i Group Fund management fee income
3i Group Annual report and accounts 2016
13
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
3
Deliver results
– Strong cash-to-cash returns
– Efficient operating platform that does
not dilute shareholder returns
– Robust and flexible capital allocation
strategy that is focused on generating
long-term capital growth and increasing
cash distributions
Debt Management
Generate strong
cash income
through the cycle
Investment process
A strong investment process is the
foundation of our reinvigorated business.
Our institutional investment platform
ensures a centralised approach to making
investment and divestment decisions.
Robust monthly portfolio monitoring
helps us to address issues promptly.
Efficient operating platform
Diversified businesses that generate both
income and capital proceeds. Recurring
cash income and a disciplined approach
to cost management avoid dilution of
capital returns.
5%
48%
3i Group Proprietary capital portfolio value
3i Group Fund management fee income
Our strategic objectives
p14
14
3i Group Annual report and accounts 2016
Strategic report
Our strategic objectives
To increase 3i’s competitive advantage, we focus on
opportunities where our sector and market expertise,
combined with our strong capital position, can create
material value for shareholders.
1
2
3
4
5
Grow investment portfolio earnings
Realise investments with good
cash-to-cash returns
Maintain an operating cash profit
Use our strong balance sheet
Increase shareholder distributions
3i Group Annual report and accounts 2016
15
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
2016 progress
2017 outlook
Weighted average
LTM earnings1 increased by
– Strongest assets are well positioned in their
chosen markets
17%
– Macro-economic pressures expected to continue
– Planned M&A activity in our newer investments
For further information see the
Financial review
p36
Private Equity proceeds of
£743m
– Private Equity expects to remain a net divestor in FY2017
due to a healthy pipeline of realisations and significant
amounts of capital chasing limited investment
opportunities that may mean that prices move outside
our target range
For further information see the
Private Equity section of the
Business review
p20
Operating cash profit of
£37m
– Subject to market conditions, Debt Management
expects to raise further funds in the US and Europe
– Continue to focus on generating income from
For further information see the
Financial review
p36
Private Equity
– Remain disciplined over costs
Proprietary capital
Net cash
£4.5bn
£165m
Dividend of
22p
– Subject to available investment opportunities, we plan
to invest €500 million – €750 million p.a. in four to seven
Private Equity investments
– Support 3iN’s equity fund raising with an intention to
maintain our 34% investment
– FY2017 bond repayment of €331 million will be met out
of cash resources
– Announced updated dividend policy and expect to pay
a base dividend of 16 pence per share in respect of FY2017
and an additional dividend based on a share of net
realised proceeds
For further information see the
Chairman’s statement
p3
1 Last 12 months (“LTM”) earnings in Private Equity companies valued on an EBITA/EBITDA basis (31 companies).
16
3i Group Annual report and accounts 2016
Strategic report
Key performance indicators
How we performed
For definitions, please see our glossary
p152
Rationale
Gross investment return (“GIR”)
as % of opening portfolio value
GIR is how we measure the performance of the
proprietary investment portfolio expressed as
a percentage of the opening portfolio value.
Cash realisations (£m)
Cash proceeds representing our proprietary share
of investment realisations completed during the year
support our returns to shareholders, as well as our
ability to invest in new opportunities.
Cash investment (£m)
Identifying new opportunities in which to invest
proprietary capital is the primary driver of the Group’s
ability to deliver attractive returns. We also invest
further capital in existing investments.
Operating cash profit (£m)
By covering the annual cost of running our business with
annual cash income, we eliminate the potential dilution
of capital returns.
Net asset value (“NAV”)
per share (pence)
NAV per share is the measure of the fair value of
our proprietary investments after the net costs
of operating the business.
Link to strategic
objectives
1
2
19%
20%
23%
28%
2013
2014
2015
2016
2
5
£606m
£677m
£841m
£771m
2013
2014
2015
2016
1
4
5
£149m
£337m
£474m
£453m
2013
2014
2015
2016
3
5
£(8)m
£5m
£28m
£37m
2014
2015
2016
2013
1
2
3
311
348
396
463
Total shareholder return (“TSR”) (%)
TSR measures the return to our shareholders through
the movement in the share price and the dividends paid
during the year.
5
2013
2014
2015
2016
30%
27%
(2)%
Share price
Dividends
54%
4%
50%
4%
26%
5%
22%
2013
2014
2015
4%
(6)%
2016
Read more on our Principal risks
p30
3i Group Annual report and accounts 2016
17
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
For further information on Executive Directors’
remuneration, please see
p82
2016 progress
Key risks
– Strong performance in Private Equity with GIR of 32% particularly
from Action, Scandlines, ATESTEO (formerly GIF) and Basic-Fit
– Investment rates or quality are lower than expected
– Subdued M&A activity and/or reduced prices in 3i’s core
– Following two years of substantial foreign exchange translation
sectors could impact timing of exits and cash returns
losses, the weakening of sterling against the euro led to
£188m of foreign exchange translation gains on our
investment portfolio
– Infrastructure and Debt Management contributed valuable
– Operational underperformance in the portfolio companies
impacts earnings growth and exit plans
– Inability to invest in the right people to support our operations
cash income to the Group
– Sterling materially strengthens against the euro and US dollar
– Realised proceeds of £743m (2015: £831m) from the disposal
of 12 Private Equity companies, the refinancing of two assets
and selling down holdings in four quoted stakes
– Received a £51m special dividend from 3iN following its sale
of Eversholt Rail
– Subdued M&A activity in our core sectors reduces investor
appetite for our assets
– Uncertainty around Brexit limits willingness to invest
– Invested £365 million of proprietary capital (2015: £369m),
– High prices reduce the attractiveness of potential
in three new Private Equity investments in our core industrial and
consumer sectors, as well as a further investment in ATESTEO
investment opportunities
– Failure to attract, invest in and retain the right investment
– Supported the launch of four CLOs by investing £60m
executives
in CLO equity
– Provided US$75m of seed capital to Debt Management
to launch its Global Income Fund
– Continued improvement in operating cash profit to £37m
driven by increase in operating cash income across the
business lines
– Good levels of dividend income in Private Equity more than
offset reduced levels of fee income from managed funds
– Increased AUM and CLO equity in Debt Management
– Disciplined approach to costs, which remain at 1% of AUM
– Failure to develop our Business Leaders Network
– Market volatility, particularly in buyouts, reduces available
liquidity to support investment
– Portfolio performance, and therefore portfolio income, is weak
– Unplanned increase in the cost base; for example legal,
regulatory or compliance costs
– Reduction in assets under management in Debt Management
– Ability to generate interest and dividends in a Private
Equity structure
– Investor appetite in a volatile macro-economic environment
– Good progression in NAV per share to 463p, up 17%
– Brexit creates uncertainty and further dampens
in the year
investor sentiment
– Strong gross investment return contribution from
– Wider G20 political and economic uncertainty impacts
Private Equity
3i’s portfolio companies and valuations
– Due in part to concerns over a potential Brexit, sterling
materially weakened against the euro
– TSR of (2)% as the final FY2015 dividend of 14.0p paid in
– Lower NAV due to investment underperformance or political
July 2015 and the interim FY2016 dividend of 6.0p paid in
January 2016 were offset by the fall in the share price to
456p at 31 March 2016 (31 March 2015: 482p)
– Our continued net divestment activity and strong balance
sheet, including a closing net cash position, supported a full
year dividend of 22.0p per share (2015: 20.0p)
and economic uncertainty
– Investor appetite in a volatile macro-economic environment
18
3i Group Annual report and accounts 2016
Strategic report
Business review
Private Equity
Investments in the year
Euro-Diesel
Euro-Diesel was established in 1989 and
designs, manufactures and maintains
Diesel Rotary Uninterruptible Power
Supply (“DRUPS”) systems. In particular,
Euro-Diesel’s unique NO-BREAK KS®
DRUPS system ensures that its customers
in EMEA, the Americas and Asia Pacific
are immediately protected from power
supply failures.
3i will support Euro-Diesel to strengthen
its market position by expanding its
international sales capability, and through
continued investment in product
innovation, allowing it to maintain its
technological leadership position.
For more information visit:
www.euro-diesel.com
Weener Plastic
Weener Plastic is a leading manufacturer of innovative plastic
packaging systems for FMCG companies. It focuses on the
design, development and manufacturing of value added caps,
valve closures and roll-on balls for blue-chip names such as
Beiersdorf, Colgate-Palmolive, L’Oréal, Nestlé, P&G, Unilever
and Homann.
3i will support management to secure further sustainable growth
using its existing innovation-led platform, investing in its
successful international expansion strategy and continuing its
operational improvement initiatives. 3i will use its international
network, experience and capital to support Weener Plastic to
pursue a buy-and-build strategy to expand into adjacent product
categories and new geographies.
For more information visit:
www.wppg.de
3i Group Annual report and accounts 2016
19
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Audley Travel
Audley Travel is a leading provider of
tailor-made experiential travel to over
80 destinations worldwide. Audley is
renowned for its superior customer
service and in-depth destination
expertise delivered by its 250 country
specialists which drives high levels
of repeat customers and referrals.
For more information visit:
www.audleytravel.com
Founded in the UK in 1996, Audley
expanded into the US in 2014. The US
business has grown rapidly and is already
generating over 10% of Group revenues.
3i will support the Audley team as they
build on their market leading position in
the UK and use 3i’s extensive experience
in backing transatlantic businesses to help
management accelerate growth in the
US business.
20
3i Group Annual report and accounts 2016
Strategic report
Business review
Private Equity
“ An excellent year with a gross
investment return of 32%, good
progress on realisations and three
important new investments.”
Alan Giddins and Menno Antal
Managing Partners and Co-heads of Private Equity
Business performance
Private Equity, the largest contributor to the Group’s returns,
delivered a strong performance in the year. The gross investment
return of £1,011 million, or 32% on the opening portfolio
(2015: £719 million, 24%), reflected the robust performance of
our largest investments. The portfolio proved its resilience against
a backdrop of volatile markets and difficult macro-economic
conditions due to its strength and diversified nature. We continue
to have no direct exposure to the energy and commodity sectors.
The impact of the weak oil and commodity prices remains limited
to a small number of assets with indirect exposure, such as JMJ
and Dynatect. Weighted average earnings (including the benefit
of portfolio acquisitions) increased by 17% in the last 12 months
(2015: 19%) reflecting the continued strong growth trajectory in
Action, as well as encouraging performance in a number of our
newer investments.
Investment activity
The investment activity seen in FY2015 continued throughout
FY2016. Although levels of M&A activity have moderated,
particularly in the first quarter of the calendar year 2016,
valuations remain high as there is still a substantial amount of
capital searching for new investment opportunities. Importantly,
we maintained our pricing discipline and invested £406 million,
of which £365 million was proprietary capital.
We invested in three new businesses in the year; Weener Plastic,
Euro-Diesel and Audley Travel. Alongside a co-investor who
contributed €50 million, we invested €201 million in Weener
Plastic, a manufacturer of plastic packaging systems
headquartered in Germany. Euro-Diesel is a leading provider of
stand-by diesel power supply systems, based in Belgium, in which
we invested €71 million of proprietary capital. In December 2015,
we invested £156 million in Audley Travel, a luxury provider of
tailor-made travel experiences based in the UK. The initial
investment included a £85 million bridging loan whilst Audley’s
existing facility was refinanced. The loan was repaid in full in
January 2016; an excellent example of how our strong balance
sheet can facilitate good investments in more volatile debt
markets. In addition to these new investments, we also took the
opportunity to purchase a minority stake in a 2013 investment,
ATESTEO (formerly known as GIF) from the founding family.
Table 1: Private Equity cash investment in the year to 31 March 2016
Investment
Type
Business description
Weener Plastic
Euro-Diesel
Audley Travel
ATESTEO
Other
Total Private Equity investment
New
New
New
Further
Further
Manufacturer of innovative plastic packaging systems
Manufacturer of uninterruptible power supply systems
Provider of tailor-made experiential travel
International transmission testing specialist
n/a
Date
Aug 15
Sep 15
Dec 15
Aug 15
n/a
Total
investment
£m
Proprietary
capital
investment
£m
183
53
159
12
(1)
406
144
52
156
11
2
365
3i Group Annual report and accounts 2016
21
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Realisations activity
Market conditions were favourable for realisations in the first half
of the 2015 calendar year, which enabled us to continue to divest
11 of our smaller or older assets. As we continue to reshape the
portfolio, we expect more of our future realisations will be driven
by our larger, stronger assets. In December 2015, we announced
the disposal of Element at a euro money multiple of 4.5x
(3.9x in sterling).
Realisations and refinancings generated aggregate proceeds
of £743 million (2015: £831 million) in the year. Excluding
refinancings of £185 million, which are usually recognised primarily
as a repayment of shareholder loans or capital and therefore do
not generate a material increase in value, this represented an
uplift over opening value of £67 million, or 14% (2015: £144 million,
27%). The lower uplift reflects the fact that the majority of
disposals were smaller or non-core assets, held on an imminent
sales basis at 31 March 2015, or were from the quoted portfolio.
At 31 March 2016, there were 47 assets and five quoted stakes
in the portfolio, down from 61 assets and four quoted stakes at
31 March 2015, and we remain on track to meet our longer-term
objective of holding fewer than 40 Private Equity investments.
Table 2: Private Equity realisations in the year to 31 March 2016
Country/
region
Benelux
Benelux
France
USA
Nordic
Brazil
Spain
France
Nordic
n/a
USA
Denmark/
Germany
Nordic
India
Benelux
n/a
Benelux
Germany
Investment
Full realisations
Element
Azelis
Labco
Touchtunes
Soyaconcept
Blue Interactive
Boomerang
Consultim
Inspecta
Other investments
Partial realisations1,3
Quintiles
Scandlines
Eltel
UFO Moviez
Refresco Gerber
Other investments
Refinancings
Action
Geka
Deferred consideration
Other investments
n/a
Total Private Equity realisations
Calendar
year
invested
31 March
2015
value1
£m
3i
realised
proceeds
£m
Profit/(loss)
in the
year2
£m
Uplift on
opening
value2
%
Residual
value
£m
Money
multiple
over
cost3
2010
2007
2008
2011
2007
2012
2008
2007
2007
n/a
2008
2007/2013
2007
2007
2010
n/a
2011
2012
n/a
145
62
36
39
16
14
7
12
6
4
50
38
31
14
9
10
168
15
2
678
179
63
42
40
17
12
11
10
6
11
53
38
30
17
11
11
168
17
7
743
36
1
6
1
–
1
4
(2)
1
6
3
–
(1)
3
2
1
–
2
5
69
25%
2%
17%
3%
–%
9%
57%
(17)%
20%
n/a
6%
–%
(3)%
21%
22%
n/a
–%
13%
n/a
10%
–
–
–
–
–
–
–
–
–
–
92
369
20
12
44
63
902
55
n/a
1,557
3.9x
1.1x
0.7x
2.2x
2.0x
0.4x
0.6x
1.5x
0.1x
n/a
3.1x
3.2x
1.0x
2.6x
1.8x
n/a
11.6x
1.3x
n/a
2.6x
IRR
31%
1%
(6)%
23%
13%
(22)%
(8)%
6%
(40)%
n/a
23%
29%
(1)%
14%
12%
n/a
80%
6%
n/a
n/a
1 For partial realisations, 31 March 2015 value represents value of stake sold.
2 Cash proceeds in the period over opening value realised inclusive of foreign exchange.
3 Cash proceeds over cash invested. For partial realisations and refinancings, valuations of any remaining investment are included in the multiple.
The sterling multiple includes the impact of foreign exchange, where appropriate.
22
3i Group Annual report and accounts 2016
Strategic report
Business review
Private Equity
Assets under management
Total AUM decreased to £3.5 billion in the year (31 March
2015: £3.8 billion), principally due to the continued net divestment
activity. Encouragingly, the performance of Eurofund V (“EFV”)
and the Growth Capital Fund continued to improve, with gross
money multiples at 31 March 2016 of 1.7x and 1.8x respectively
(31 March 2015: 1.4x, 1.7x). The investments made in EFV’s
2010–2012 investment period continue to show very strong
performance, with a money multiple of 3.4x at 31 March 2016
(31 March 2015: 2.6x). The Growth Capital Fund benefited
from the realisation of Labco and further disposals of Quintiles,
a quoted holding. The value of 3i’s Proprietary Capital increased
to £3.7 billion in the year (31 March 2015: £3.1 billion) and,
inclusive of third-party funds, increased to €6.8 billion (31 March
2015: €6.3 billion).
We concluded a review of our resources and investment
opportunities during the year. As a result, we are planning for a
reduction in our Nordic team while we seek to increase the size
of the investment teams in some of our key geographies in
Europe and the US.
Outlook
We remain focused on the investment pipeline for FY2017,
sourcing attractive opportunities through our international team
and network of advisers and business leaders, whilst maintaining
price discipline. Conditions for M&A are expected to remain
volatile and, whilst our portfolio companies cannot be immune
to macro-economic pressures, our rigorous investment process
and active portfolio management approach allows us to address
such issues promptly.
Table 3: Private Equity assets under management at 31 March 2016
Private Equity
Close date
3i Growth Capital Fund
3i Eurofund V
3i Eurofund IV
Other
Total Private Equity AUM
Mar 10
Nov 06
Jun 04
Various
Original
fund size
Original 3i
commitment
€1,192m
€5,000m
€3,067m
Various
€800m
€2,780m
€1,941m
Various
Remaining 3i
commitment1
at March
2016
%
invested
at March
2016
€346m
€116m
€82m
n/a
53%
94%
95%
n/a
Gross
money
multiple2
at March
2016
1.8x
1.7x
2.3x
n/a
Fee income
received
in the
year
£m
2
9
–
2
13
AUM
€266m
€1,809m
€533m
£1,370m
£3,512m
1 All funds are beyond their investment period.
2 Gross money multiple is the cash returned to the fund plus remaining value as at 31 March 2016, as a multiple of cash invested.
Infrastructure
West of Duddon Sands
Offshore Transmission Owner
In August 2015, 3iN invested £23 million in a 50% holding in the
West of Duddon Sands Offshore Transmission Owner (“WODS
OFTO”) project. This project involves the acquisition, financing
and operation of power transmission cables and associated
electrical equipment connecting the West of Duddon Sands
offshore wind farm, located off the coast of Cumbria in the Irish
Sea, to the onshore grid. The project operates under a licence
awarded by Ofgem, the UK’s electricity regulator, with a
20-year revenue entitlement period, providing predictable
cash flows over the period.
As Investment Adviser to 3iN, 3i used its extensive experience
in managing OFTO investments, gained through the
acquisition of the Barclays European Infrastructure business
in November 2013, to complete the transaction.
3i Group Annual report and accounts 2016
23
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
“ Infrastructure had a busy year in terms
of business activity, demonstrating our
ability to access attractive investment
opportunities in a competitive market.”
Ben Loomes and Phil White
Managing Partners and Co-heads of Infrastructure
The Infrastructure business performed well in the year, building
on the strong result in FY2015 driven by the sale of 3iN’s holding
in Eversholt Rail. Infrastructure delivered a gross investment return
of £47 million, or 8% on the opening portfolio (2015: £96 million,
20%). The business generated cash income of £49 million through
its fund advisory and management activities and dividends
received from 3iN (2015: £47 million). In addition, 3i received a
£51 million special dividend from 3iN (2015: nil) following 3iN’s
sale of Eversholt Rail.
Investment Adviser to 3iN
To reflect the compression in market returns and the evolution
of the composition of 3iN’s underlying investment portfolio, 3iN’s
total return target was updated to between 8% and 10% to be
delivered over the medium term (previously a 10% annual target)
in May 2015. Given the competition for large core assets in the
global infrastructure sector, the team has focused on sourcing
mid-market economic infrastructure and greenfield projects
across Europe. The team made good progress against these
revised objectives and advised 3iN on four new investments in its
target markets totalling £193 million (2015: £114 million) as well as
the £75 million investment in Wireless Infrastructure Group, the
c.£154 million investment in TCR and the c.£4 million investment
in Hart van Zuid announced in April 2016. On 12 May 2016, 3iN
announced its intention to raise new equity of up to £350 million
to fund new investments and its future pipeline.
3iN has built an attractive portfolio of economic infrastructure
assets across Europe which performed well and generated a
strong total return of 14% in FY2016. In particular, the portfolio
valuation benefited from positive regulatory developments for
Elenia, an electricity distribution and district heating company
based in Finland. This performance builds on the strong long-
term performance of 3iN, which has delivered an annualised
total shareholder return of 11.3% since its IPO in 2007.
Under the terms of the advisory agreement, 3i received an
advisory fee of £16 million (2015: £16 million) and a NAV based
performance fee of £20 million (2015: £45 million) from 3iN, of
which £15 million (2015: £34 million) was accrued as payable
to the team.
24
3i Group Annual report and accounts 2016
Strategic report
Business review
Infrastructure
Business performance
3iN performance
In addition to being its investment adviser, 3i holds a 34%
(31 March 2015: 34%) stake in 3iN. Reflecting its strong positioning,
3iN’s share price continued to perform well in a year of equity
market volatility and generated a total shareholder return of 13%.
Outlook
The team’s focus on origination and asset management
capabilities together with a healthy pipeline of attractive
investment opportunities across our target markets means
that the business remains well placed to continue its current
good performance and to grow its assets under management
through selective investment.
3i’s investment in 3iN contributed £33 million of unrealised
value (2015: £77 million) and £21 million of dividend income
(2015: £20 million). In July 2015, 3iN also paid a £150 million
special dividend to shareholders, following its sale of Eversholt
Rail. 3i’s share of the special dividend, £51 million, was treated
as realised proceeds.
Assets under management
The Infrastructure AUM decreased to £2.4 billion (31 March
2015: £2.5 billion) principally due to the payment of the special
dividend from 3iN. In addition, the performance of the assets
in the India Infrastructure Fund remained weak; the economic
environment and ongoing depreciation of the rupee against
the US dollar, in which the fund is denominated, resulted in a
£11 million reduction in the value of 3i’s direct share of the 3i India
Infrastructure Fund to £53 million (31 March 2015: £64 million).
Table 4: Infrastructure assets under management at 31 March 2016
Close date
Original
fund size
Original 3i
commitment
Remaining 3i
commitment
at March
2016
%
invested
at March
2016
3iN
BIIF
BEIF II
India fund
Other
Total Infrastructure AUM
Mar 07
May 08
Jul 06
Mar 08
Various
n/a
£680m
£280m
US$1,195m
Various
n/a
n/a
n/a
US$250m
Various
n/a
n/a
n/a
US$35m
n/a
n/a
90%
97%
73%
n/a
Gross
money
multiple1
at March
2016
n/a
n/a
1.1x
0.5x
n/a
Fee income
received
in the
year
£m
16
5
2
4
1
28
AUM
£1,248m2
£580m
£80m
US$584m3
£145m
£2,406m
1 Gross money multiple is the cash returned to the fund plus remaining value as at 31 March 2016, as a multiple of cash invested.
2 Based on latest published NAV (ex-dividend).
3 Adjusted to reflect 3iN’s US$250 million share of the fund.
3i Group Annual report and accounts 2016
25
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
“ A solid year with four new CLOs and
a new fund launch, despite volatility
in the credit markets.”
Jeremy Ghose
Managing Partner and CEO, 3i Debt Management
Business performance
The Debt Management team continued to make good progress
in fund raising despite more volatile conditions for CLO issuance.
AUM increased to £8.1 billion (31 March 2015: £7.2 billion) as good
levels of fund raising activity and favourable foreign exchange
rates more than offset the impact of the run off of older funds.
An important source of operating cash income, the business
generated £38 million of fee income in the year (2015: £34 million)
and portfolio income of £35 million (2015: £21 million).
The pricing of debt instruments has been subject to significant
volatility since the middle of 2015, particularly in the US, due to
increased credit concerns about specific sectors such as oil and
gas, metals and mining, energy and utilities. The European
market, which generally has more limited exposure to oil and gas
and metals and mining, experienced less volatility. As long-term
holders of CLO equity positions, our returns are ultimately driven
by the cash flows and the realised default and loss rates in the
portfolio, rather than short-term unrealised fair value movements,
but we remain subject to the impact of mark-to-market volatility.
Debt Management
3i Global Floating Rate Income Fund
(“Global Income Fund”)
The Global Income Fund launched in June 2015
with US$75 million of seed capital from 3i and total
assets under management of US$150 million. It aims
to generate income, preserve capital for investors
and seeks capital appreciation when market
opportunities arise.
The Global Income Fund is managed jointly by
3i’s London and New York teams, and this supports
investment in a diverse global portfolio of corporate
credit assets, with exposure principally to North
American and western European issuers. The teams
seek to take advantage of relative value between
assets, sectors and geographies, and aim to protect
against downside risk and maintain portfolio
diversity. At 31 March 2016, the fund had assets
under management of US$188 million and had
outperformed its benchmark by over 2% since
inception.
For more information visit:
www.3i.com/our-business/debt-management/
funds/3i-global-floating-rate-income-fund
26
3i Group Annual report and accounts 2016
Strategic report
Business review
Debt Management
Fund raising activity
Debt Management made good progress, particularly in the
first half of our financial year, in generating new AUM. The team
closed two CLOs in Europe, Harvest XII and Harvest XIV, and two
in the US, Jamestown VII and Jamestown VIII, raising a total of
£1.3 billion new CLO AUM. CLO issuance slowed significantly in
the second half of our financial year. US CLO issuance in the three
months to 31 March 2016 was 25% of the prior year CLO volumes.
However, following an improvement in sentiment from March
2016, prices are recovering and our latest European CLO,
Harvest XV, priced at the end of March and closed on 12 May
2016. We also had an open CLO warehouse vehicle in the US
in anticipation of launching the first US CLO of FY2017.
Following on from the successful launch of the European Middle
Market Loan Fund, we continued to diversify our product offering
and launched a new Global Income Fund with US$75 million of
seed capital from 3i. The fund is an open-ended senior debt fund
that invests across the US and Europe and, as at 31 March 2016,
had AUM of US$188 million. The US Senior Loan Fund also
continued to perform strongly, outperforming its benchmarks,
and AUM increased to US$178 million (31 March 2015:
US$157 million).
Proprietary Capital investment
Including the US$75 million seed capital contributed to the Global
Income Fund, we had £229 million (31 March 2015: £176 million) of
proprietary capital invested in the Debt Management business at
31 March 2016. 3i is required to hold a minimum 5% stake in the
European CLOs it manages. We also structure our US CLOs in
anticipation of the implementation of similar risk retention rules
in the US in December 2016. Our ability to comply with the risk
retention rules is important as it is now a prerequisite for
managers, even in the US, to demonstrate compliance with the
regulatory rules.
In addition to the investments 3i makes in the CLOs for regulatory
reasons, 3i is also the first loss investor in the majority of the
warehouse facilities used to accumulate loans prior to the launch
of a CLO. At 31 March 2016, the total invested by 3i in these
facilities was £17 million (31 March 2015: £43 million).
Table 5 details cash investment in the year.
Table 5: Debt Management cash investment
in the year to 31 March 2016
Investment
Type
Total 3i
investment
£m
Date
Global Income Fund Open-ended senior debt fund Jun 15
Aug 15
Harvest XII
New European CLO
Aug 15
Jamestown VII
New US CLO
Nov 15
Harvest XIV
New European CLO
Dec 15
Jamestown VIII
New US CLO
Further investment in US CLO Mar 16
Jamestown III
European warehouses1 Warehouse
Various
Various
Warehouse
US warehouse
Various
n/a
Other
Total Debt Management investment
48
15
15
28
5
4
(39)
10
2
88
1 Net cash received back from warehouses on the successful close of
the European CLOs.
Outlook
The underlying credit performance of the portfolios underpinning
our CLOs and other funds remains sound, with metrics
outperforming market benchmarks despite the challenging year.
Given our strong relationships with investors and ability to meet
current and future fund risk retention requirements, we are in a
good position to continue launching new CLOs and raising funds,
if market conditions permit and returns are sufficiently attractive.
Strategic report
Risk management
3i Group Annual report and accounts 2016
27
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Effective risk management underpins
the successful delivery of our strategy.
Integrity, rigour and accountability are
central to our values and culture at 3i
and are embedded in our approach
to risk management.
Understanding our risk appetite and culture
As both an investor and asset manager, 3i is in the business of
taking risk in order to seek to achieve its targeted returns for
investors and shareholders. The Board approves the strategic
objectives that determine the level and types of risk that 3i is
prepared to accept. The Board reviews 3i’s strategic objectives
and risk appetite at least annually.
Risk appetite
3i’s risk appetite is defined by its objective to invest proprietary
capital in assets that generate sufficient proceeds to fund new
opportunities and allow material shareholder distributions as
well as good levels of cash income.
Investment risk
The substantial majority of the Group’s capital is invested in
Private Equity. Private Equity investments are subject to a range
of factors which include:
– Return objective: individually assessed but subject to a target
2x money multiple over three to five years
– Geographic focus: core markets of northern Europe and
North America
– Sector expertise: focus on Business Services, Consumer
and Industrials
In order to support its institutional asset management capability,
3i’s risk appetite policy is built on rigorous and comprehensive
investment procedures and conservative capital management.
– Vintage: invest c.€500 million–€750 million per annum in four
to seven new investments in companies with an enterprise
value range of €100 million–€500 million at investment
Culture
Integrity, rigour and accountability are central to our values and
culture and are embedded in our approach to risk management.
Our Investment Committee which has oversight of the investment
pipeline development and approves new investments, significant
portfolio changes and divestments, is integral to embedding
our institutional approach across the business. It ensures
consistency and compliance with 3i’s financial and strategic
requirements, cultural values and appropriate investment
behaviours. Members of the Executive Committee have
responsibility for their own business or functional areas and the
Group expects individual behaviours to meet the Group’s high
standards of conduct. All employees share the responsibility
for upholding 3i’s strong control culture and supporting effective
risk management. Senior managers, typically those who report
to Executive Committee members, are required to confirm their
individual and business area compliance. In addition, all staff are
assessed on their compliance with the Group values as part of
their annual appraisal.
Our other two businesses are more modest users of
proprietary capital but each investment is subject to
rigorous review.
Capital management
3i adopts a conservative approach to managing its capital
resources. There is no appetite for significant structural gearing
at the Group level although short-term tactical gearing will be
used. In addition, we have a limited appetite for the dilution of
capital returns as a result of operating and interest expenses.
All three of our business lines, Private Equity, Infrastructure
and Debt Management also generate cash income to
mitigate this risk.
The following sections explain how we control and manage the
risks in our business. It outlines the key risks, our assessment of
their potential impact on our business in the context of the current
environment and how we seek to mitigate them.
3i Group’s Pillar 3 document
can be found at
www.3i.com
28
3i Group Annual report and accounts 2016
Strategic report
Risk management
Approach to risk governance
The Board is responsible for risk assessment, the risk
management process and for the protection of the Group’s
reputation and brand integrity. It considers the most significant
risks facing the Group and uses quantitative analyses, such as
the vintage control which considers the portfolio concentration
by revenue, geography and sector, and liquidity reporting,
where appropriate.
Risk governance structure
Overview of risk management framework and governance structure
Non-executive oversight is also exercised through the Audit and
Compliance Committee which focuses on upholding standards of
integrity, financial reporting, risk management, going concern and
internal control. The Audit and Compliance Committee’s activities
are discussed further on pages 75 to 78.
Treasury Transactions Committee
Board
Audit and Compliance Committee
– Considers risk implications of specific
treasury transactions as required.
– Determines the Group’s risk appetite
as part of strategy setting.
– A quorum of members meet as
required.
– Overall responsibility for maintaining
a system of internal controls that
ensures an effective risk management
and oversight process operates
across the Group.
– Considers risks to the Group’s brand,
values and reputation as required.
– Meets at least six times a year.
Chief Executive
– Receives reports from the Head of
Internal Audit on the Group’s risk
management processes and system
of internal controls.
– Receives reports from the Head of
Group Compliance on regulatory
and compliance matters.
– Receives reports from the Head of Tax
on Group tax management.
– Updated at each meeting on the
outputs of the latest Group Risk
Committee meeting with the
opportunity to contribute views
or raise questions.
– Meets at least four times a year.
Investment Committee
Executive Committee
Group Risk Committee
– Considers risk in the context of
individual investments, portfolio
management decisions and
divestments.
– Meets as required.
Conflicts Committee
– Deals with potential conflict issues.
– Meets as required.
Committees of the Board
Committees of the Chief Executive
Independent review of potential conflict issues
Risk reporting to Audit and Compliance Committee
– Principal decision-making body in
respect of managing the business.
– Meets monthly.
– Delegated responsibility for risk
management and oversight across the
Group, reflecting the Board’s appetite
for risk and any specific limits set.
– Maintains the Group risk review, which
summarises the Group’s risk exposure
and associated mitigation or response
plan based on risks identified.
– Meets four times a year to consider
the Group risk review, including
adequacy of risk mitigation and
controls.
– Chairman provides update at each
meeting of the Audit and Compliance
Committee.
3i Group Annual report and accounts 2016
29
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
The Board has delegated the responsibility for risk oversight to
the Chief Executive. He is assisted by the Group Risk Committee
(“GRC”) in managing this responsibility, guided by the Board’s
appetite for risk and any specific limits set. The GRC maintains the
Group risk review, which summarises the Group’s principal risks,
associated mitigating actions and key risk indicators, and
identifies any changes to the Group’s risk profile. The risk review
is updated quarterly and the Chief Executive provides quarterly
updates to each Audit and Compliance Committee meeting
where the Committee members contribute views and raise
questions. The last risk review was completed in May 2016.
The risk framework is further augmented by a separate Risk
Management Function which has specific responsibilities under
the European Alternative Investment Fund Managers Directive
(“AIFMD”). It meets ahead of the GRC meetings to consider the
key risks impacting the Group, and any changes in the relevant
period where appropriate. It also considers the separate risk
reports for each AIF managed by the Group, including areas such
as portfolio composition, portfolio valuation, operational updates
and team changes, which are then considered by the GRC.
Assurance over the robustness and effectiveness of the Group’s
overarching risk management processes and compliance with
relevant policies is provided to the Audit and Compliance
Committee through the independent assessment by Internal
Audit and the work of Group Compliance on regulatory risks.
Assurance over the robustness of the Group’s valuation policy
is provided by the Valuations Committee whose report can be
found on pages 79 to 81.
In addition to the above, a number of other committees
contribute to the Group’s overall risk governance structure,
as set out on page 28.
Risk management framework
The Group’s risk management framework is designed to support
the delivery of the Group’s strategic objectives.
The key principles that underpin risk management in the
Group are:
– The Board and the Executive Committee promote a culture
in which risks are identified, assessed and reported in an open,
transparent and objective manner; and
– The over-riding priority is to protect the Group’s long-term
viability and reputation and produce sustainable, medium
to long-term cash-to-cash returns.
Managing the Group’s Environmental, Social and Governance
(“ESG”) risks is central to how we do business and a key part of
our risk management framework. It also forms part of our half-
yearly portfolio company reviews as described in the Valuations
Committee report on page 79.
In practice, the Group operates a “three lines of defence”
framework for managing and identifying risk. The first line of
defence against outcomes outside our risk appetite is the
business function and the respective Managing Partners across
Private Equity, Infrastructure and Debt Management.
Line management is supported by oversight and control functions
such as finance, human resources and legal which constitute the
second line of defence. The Compliance function is also in the
second line of defence; its duties include reviewing the effective
operation of our processes in meeting regulatory requirements.
Internal Audit provides independent assurance over the operation
of controls and is the third line of defence. The internal audit
programme includes the review of risk management processes
and recommendations to improve the internal control
environment.
Risk review process
The Group risk review process includes the monitoring of key
strategic and financial metrics considered to be indicators of
potential changes in the Group’s risk profile. The review includes,
but is not limited to, the following reference data:
– Financial performance and strategic dashboards
– Vintage control and asset allocation analysis
– Macro-economic and M&A market overview
– Liquidity management
– Capital adequacy, including stress testing
– Operating expenses
– Portfolio performance reports for Private Equity, Infrastructure
and Debt Management
– Risk reports for managed AIFs
– Quarterly Group risk log
In addition to the above, the GRC considers the impact of any
changes and developments in its risk profile, strategic delivery
and reputation quarterly.
The GRC uses the above to identify a number of key risks. It then
evaluates the impact and likelihood of each key risk, with reference
to associated measures and key performance indicators.
The adequacy of the mitigation plans is then assessed and,
if necessary, additional actions are agreed and then reviewed
at the subsequent meeting.
A number of focus topics are also agreed in advance of each
meeting. In FY2016, the GRC covered the update to the Group’s
IT strategy; 3i’s approach to ESG especially with respect to its
portfolio companies; business continuity and cyber security; an
update on the implementation of Infrastructure’s revised strategy,
as well as the changes to the UK Corporate Governance Code
and relevant risks for 3i associated with the UK EU referendum.
There were no significant changes to the Group’s approach to
risk governance or its operation in FY2016 but we have continued
to refine our framework for risk management and reporting
where appropriate.
Further details on 3i’s approach as a responsible investor are
available at www.3i.com
30
3i Group Annual report and accounts 2016
Strategic report
Principal risks and mitigations
Aligning risk to our strategic objectives
Review of principal risks
The disclosures on the following pages are not an exhaustive
list of risks and uncertainties faced by the Group, but rather a
summary of those principal risks which are under active review
by the GRC and Board, and are believed to have the potential
to affect materially the achievement of the Group’s strategic
objectives and impact its financial performance, reputation
and brand integrity.
The Group’s risk profile and appetite remain broadly stable.
Although the economic outlook deteriorated and market volatility
and uncertainty increased in the second half of our financial year,
the Group’s overall risk profile has not changed significantly.
The Group believes that its consistent strategy of focusing on core
sectors and geographies, its institutional process-led approach to
investment and strong culture have helped it to maintain its stable
risk profile. A number of risks have been consolidated year on year
in the Principal risks and mitigations table to best reflect their
impact on the Group.
External
The external environment remains difficult. There has been a
significant amount of uncertainty in the Eurozone and the wider
emerging markets’ economies fuelled by a challenging global
macro-economic context and ongoing geo-political tensions,
including the UK referendum on EU membership. In addition,
there is also some evidence of softening of US and Eurozone
growth rates. The Group continues to monitor all of these
events closely.
The Group is subject to a range of regulatory and tax reporting
requirements which continue to evolve. These include the AIFMD,
regulations under the European Market Infrastructure Regulation
(“EMIR”), Capital Requirements Directive IV (“CRDIV”), the FCA’s
Client Asset rules (“CASS”), the Foreign Account Tax Compliance
Act (“FATCA”) and the OECD’s Common Reporting Standard.
These developments have resulted in increased reporting
requirements, operational complexity and operational cost to
the business. Managing these regulatory requirements is a key
priority and they are the subject of regular updates to Executive
Committee and the Board. To date, they have had limited
practical impact on 3i’s ability to deliver its strategy.
Looking forward, although the Base Erosion and Profit Shifting
(“BEPS”) proposals have now been published, it is not clear
how individual countries will implement these proposals and
the timing and extent of implementation as they do. The UK is
already in the process of changing its domestic tax rules and
implementing certain BEPS actions such as country-by-country
reporting and limiting the tax deductibility for interest expense.
The OECD has indicated that further detail on some of the
proposals will be published in 2016. The Group continues to
monitor developments carefully and intends to comply with
new rules as and when they are implemented.
Investment
Being an investment company, there are a number of significant
risks that impact our ability to achieve our strategic objectives.
Firstly our ability to source attractive investment opportunities
at the right price is critical. The investment case presented at
the outset will include the expected benefit of operational
improvements, growth initiatives and M&A activity that will be
driven by our active management approach, together with the
portfolio company’s management team. It will also include a
view on the likely exit strategy and timing. The execution of this
investment case is monitored through our monthly portfolio
monitoring and our semi-annual reviews which focus on longer
term and strategic developments. Alongside this we need to
recognise the need to plan and execute a successful exit at the
optimum time for the portfolio company’s development after
taking account of market conditions. These risks are closely linked
to the economic environment noted above. To mitigate these
risks, we focus on sectors and geographies where our expertise
and network can drive significant outperformance.
In addition, there are a number of risks specific to each business
line as follows:
Private Equity
Regular and robust portfolio monitoring procedures remain
critical given the volatile economic backdrop and as the
investment portfolio becomes more concentrated. The Private
Equity partners hold a detailed monthly portfolio monitoring
meeting that is attended by the Group Chief Executive and the
Group Finance Director. In addition, the Valuations Committee
reviews the valuation assumptions of our more material assets
quarterly. Individual portfolio company failures could have
adverse reputational consequences for the Group, even though
the value impact may not be material.
Infrastructure
3iN announced an amended total return target of 8% – 10% per
annum over the medium term in May 2015 (previously a 10%
annual target) as strong investor demand for yield was impacting
the business’ ability to maintain investment rates in quality assets.
Infrastructure remains focused on investing selectively within its
target sectors and developing both organic and inorganic growth
opportunities. In addition, its engaged asset management
approach supports many of the investments in the economic
infrastructure and project portfolios.
3i Group Annual report and accounts 2016
31
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Viability statement
The Directors have assessed 3i’s viability over a three-year
period to March 2019. 3i conducts its strategic planning over
a five-year period; this statement is based on the first three
years, which provides more certainty over the forecasting
assumptions used. 3i’s strategic plan, Internal Capital
Adequacy Assessment Process (“ICAAP”) and associated
principal risks (as set out on pages 32 to 35 of the Strategic
report) are the foundation of the Directors’ assessment.
The Directors reviewed an assessment of the potential
effects of 3i’s principal risks on its current portfolio and
forecast investment and realisation activity. They considered
the consequent impact on 3i’s capital and liquidity in a
number of severe but plausible scenarios.
Based on this assessment, the Directors have a reasonable
expectation that the Company and the Group will be able
to continue in operation and meet all their liabilities as they
fall due up to March 2019.
Debt Management
The principal risks are the ability to grow AUM profitably in line
with its business plan and to mitigate negative impact on returns.
The business is exposed to volatility in the credit markets and the
challenging market conditions in the US have negatively impacted
valuations of our CLO equity in FY2016. Our teams manage the
underlying credit portfolios very actively which, in some cases,
might include taking early losses in volatile markets, if appropriate.
Due to the introduction of risk retention rules in Europe (effective
2011) and the US (effective December 2016), we are required,
as managers, to take minimum positions in the CLO funds we
manage. In addition, during the warehouse phase of establishing
CLOs, the Group is exposed to market volatilities and the
potential for further capital calls.
Operational
One of the key areas of increased potential operational risk is
cyber security. In response to this growing threat, management
engaged KPMG to conduct an independent review of the
adequacy of the Group’s ability to prevent, detect and respond to
cyber security threats. In addition, the Group rolled out a cyber
security training course for all staff and refreshed information
security policies and incident management processes. The Group
also conducted a wider review of its business continuity and
resilience capabilities. The findings and proposed enhancements
from these various workstreams were discussed at GRC and are
being implemented across the Group.
The Board also received regular updates on ESG risks and
whether our investors’ skill sets and business development
capabilities could support the Group’s strategic delivery.
Detailed resource plans are in place at the business line level
and the Board conducts an annual review of the Group’s
organisational capability and succession plans (which include
contingencies against loss of key staff). The last review was
conducted in September 2015.
32
3i Group Annual report and accounts 2016
Strategic report
Principal risks and mitigations
External
Key risk factors
Link to strategic objectives
Potential impact
Economic growth and investor
and market confidence is
vulnerable to ongoing challenges,
including geo-political
developments, in the global
economy
1 Grow investment portfolio earnings
2
Realise investments with good
cash-to-cash returns
Significant currency movements
and volatility
1 Grow investment portfolio earnings
5
Increase shareholder distributions
Increased volatility in equities
and fixed income
1 Grow investment portfolio earnings
Subdued M&A activity and high
pricing in 3i’s core markets
2
5
2
4
5
Realise investments with good
cash-to-cash returns
Increase shareholder distributions
Realise investments with good
cash-to-cash returns
Use our strong balance sheet
Increase shareholder distributions
Impact of new regulations on
3i’s new and existing business
3 Maintain an operating cash profit
– Limited growth or reduction in NAV
owing to contraction of earnings and/or
valuation multiples in Private Equity
or Infrastructure
– Impact on investment rates and
realisations
– Impacts general market confidence
and lowers risk appetite
– Leads to reduced M&A volumes,
economic instability and lower growth
– Unhedged foreign exchange rate
movements impact total return and NAV
– May impact portfolio performance
– Increases risks with IPO exit route and
bank financing
– Potential for large equity market fall to
impact valuations and performance
– Investment and realisation levels fall
– Reduces capacity to invest and pay
enhanced shareholder distributions
– Results in lack of primary deal flow in
the US and European debt markets
– Regulatory constraints on possible future
business development and increased
operating costs
– Complexity increases risk of
non-compliance, with possible
financial or reputational consequences
3i Group Annual report and accounts 2016
33
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Movement in risk
status in 2016
2016 outcome
– GIR good at 28% with impact from negative
macro-economic and geo-political uncertainty
on 3i and its portfolio companies offset by
robust performance in largest investments
– Gearing remains nil and liquidity strong at
£1.4bn
– Potential implication of the EU referendum
reviewed at Executive Committee and GRC
– Positive FX impact on NAV
– FX exposures at the portfolio company level
monitored and hedged appropriately
– Realised £111m from continued sales of quoted
stakes when the markets permitted and
completed the IPO of UFO
– Quoted asset exposure of 15% with 10% being
3iN (13% TSR in the year)
– Policy to adjust multiples to reflect longer-term
trends mitigated volatility in FY2016
– Markets were supportive in the first half of the
year. We disposed of 11 smaller assets as well
as Element in December 2015
– Invested in three new Private Equity companies
– Changes in UK and EU regulatory and tax
regimes, including BEPS, are resulting in
additional operational complexity and cost
to the Group
– No significant practical constraints during the
year on the ability to deliver strategy but
increased external reporting
Risk management and mitigation
– Monthly portfolio monitoring
to address any portfolio issues
promptly
– Regular monitoring of liquidity
and balance sheet
– Regular assessment of exposures
to geo-political risk across the
Group’s investment portfolio
and investment pipeline
– Consideration of FX exposures in
investment cases
– Monitoring of asset exposures by
currency at Group and portfolio
company level
– Specific short-term hedging on
entry or exit of investments
considered on a case by case basis
– Focus on exit pipeline and
refinancing strategies
– Dedicated banking team to
manage and monitor bank
relationships
– Close monitoring of Private Equity
performance and valuations and
capital at risk in Debt Management
– Active management of exit
strategies by Investment
Committee to adapt to market
conditions
– Regular monitoring of new
investment work in progress
and market activity
– Detailed evaluation of business
impact and alternate structures
– Appropriate processes,
procedures and additional
resource as required to support
compliance
– Direct engagement with
regulators’ consultations
Risk exposure has increased
No significant change in risk exposure
Risk exposure has decreased
p75
Audit and Compliance Committee report
34
3i Group Annual report and accounts 2016
Strategic report
Principal risks and mitigations
Investment
Key risk factors
Link to strategic objectives
Potential impact
Investment rate or quality is
lower than expected due to
low M&A volumes or high levels
of uninvested capital leading
to high prices
4
5
Use our strong balance sheet
Increase shareholder distributions
– Impacts longer-term returns and capital
management and therefore ability to
deliver strategic plan
– Poor investment impacts Group’s
reputation and ability to attract investors
1 Grow investment portfolio earnings
Realise investments with good
cash-to-cash returns
Increase shareholder distributions
– Reduction in NAV and realisation potential
– Increased covenant risk in weaker
companies
Portfolio performance is weak
or is impacted by a significant
ESG incident
Operational
Organisational development,
for example people changes
2
5
2
3
5
Realise investments with good
cash-to-cash returns
Maintain an operating cash profit
– Poor execution of changes impacts
delivery of strategic objectives
– Potential to undermine investor and/or
shareholder confidence
Increase shareholder distributions
Increase in cyber security threats
1 Grow investment portfolio earnings
2
4
5
Realise investments with good
cash-to-cash returns
Use our strong balance sheet
Increase shareholder distributions
– Potential loss of operation of core
systems or sensitive data
– Disruption to our business and that
of our portfolio companies
– Inability to deliver strategic plan
3i Group Annual report and accounts 2016
35
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Risk management and mitigation
– Regular monitoring of investment
and divestment pipeline
– Close oversight by management
and early involvement of
Investment Committee when key
targets identified
– Disciplined approach to sourcing
investment opportunities
– Regular review of asset allocation
– Focus on ESG in investment case
and at semi-annual Portfolio
Company Reviews
– Active management of new
portfolio company chairman,
CEO and CFO appointments
– Dedicated banking team to
manage and monitor bank
relationships
– Capability and succession planning
reviews
– Regular updates on progress of
change projects to GRC and/or
the Board
– Regular monitoring and
engagement with external advisers
to determine best practice
Movement in risk
status in 2016
2016 outcome
– Substantial amounts of capital chasing yield
but invested in three new investments and
generated £743m of proceeds in Private Equity
– Significant increase in origination activity
in Infrastructure with four new investments
– Weighted average LTM earnings growth of 17%
– Smaller investment portfolio by number allows
for more targeted approach to RI/ESG risk
evaluation
– Organisational capability and succession plan
reviewed by the Board in September 2015
– Cyber security review completed with external
advisers and agreed actions in progress
– Cyber security review completed with external
advisers also completed on 21 portfolio
companies across Private Equity and
Infrastructure
Risk exposure has increased
No significant change in risk exposure
Risk exposure has decreased
p75
Audit and Compliance Committee report
36
3i Group Annual report and accounts 2016
Strategic report
Financial review
“ Another year of robust results
with each business continuing
to perform well.”
Julia Wilson
Group Finance Director
The table below summarises our key financial data under the Investment basis.
Table 6: Summary financial data
Investment basis
Group
Total return
Total return on opening shareholders’ funds
Dividend per ordinary share
Operating expenses
As a percentage of assets under management
Operating cash profit
Proprietary capital return
Realisation proceeds
Uplift over opening book value1
Money multiple
Gross investment return
As a percentage of opening 3i portfolio value
Operating profit 2
Proprietary capital balance sheet
Cash investment3
3i portfolio value
Gross debt
Net cash
Gearing4
Liquidity
Net asset value
Diluted net asset value per ordinary share
Fund management
Total assets under management
Third-party capital
Proportion of third-party capital
Year to/as at
31 March
2016
Year to/as at
31 March
2015
£824m
21.7%
22.0p
£134m
1.0%
£37m
£659m
19.9%
20.0p
£131m
1.0%
£28m
£796m
£841m
£70m/13% £145m/27%
2.0x
£805m
22.6%
£721m
2.4x
£1,069m
27.6%
£920m
£453m
£4,497m
£837m
£165m
nil
£1,352m
£4,455m
463p
£474m
£3,877m
£815m
£49m
nil
£1,214m
£3,806m
396p
£13,999m
£10,703m
76%
£13,474m
£10,140m
75%
1 Uplift over opening book value excludes refinancings.
2 Operating profit for the proprietary capital activities excludes performance fees payable/receivable.
3 Cash investment includes £4 million of Debt Management investment awaiting settlement at 31 March 2016 (31 March 2015: nil).
4 Gearing is net debt as a percentage of net assets.
3i Group Annual report and accounts 2016
37
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Basis
3i prepares its statutory financial statements in accordance with
IFRS. The introduction of IFRS 10 in 2014 was important for
investment companies such as 3i, as the investment entity
exception it contained eliminated the risk of having to consolidate
portfolio investments. However, consistent with previous years,
we also report using a non-GAAP “Investment basis”, as we
believe it aids users of our report to assess the Group’s
underlying operating performance. Total return and net assets
are the same under the Investment basis and IFRS and we
provide more detail on IFRS 10, as well as a reconciliation of
our Investment basis financial statements to the IFRS financial
statements, from page 48.
Total return
The Group generated a total return of £824 million, or a profit
on opening shareholders’ funds of 21.7% (2015: £659 million or
19.9%) in the year as the robust performance of its underlying
portfolio more than offset the impact of volatile market
conditions. The Proprietary Capital business delivered a gross
investment return of £1,069 million (2015: £805 million) and an
operating profit before carry of £920 million (2015: £721 million),
underpinned by the strong performance of its portfolio
companies as well as by the strengthening of the euro and US
dollar against sterling. Fund Management operating profit before
carry was £20 million (2015: £26 million). Further detail regarding
the performance during the year is provided below.
Table 7: Total return for the year to 31 March
Investment basis
Realised profits over value on disposal of investments
Unrealised profits on revaluation of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Synthetic fees
Operating expenses1
Interest receivable
Interest payable
Movement in the fair value of derivatives
Exchange movements
Operating profit before carry
Carried interest and performance fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Re-measurements of defined benefit plans
Total comprehensive income (“Total return”)
Total return on opening shareholders’ funds
2016
Proprietary
Capital
£m
2016
Fund
Management
£m
72
669
71
63
6
188
1,069
–
(44)
(31)
4
(47)
–
(31)
920
–
–
–
–
–
–
–
79
44
(103)
–
–
–
–
20
2015
Proprietary
Capital
£m
2015
Fund
Management
£m
162
684
45
62
6
(154)
805
–
(45)
(32)
3
(49)
(1)
40
721
–
–
–
–
–
–
–
80
45
(99)
–
–
–
–
26
2016
Total
£m
72
669
71
63
6
188
1,069
79
–
(134)
4
(47)
–
(31)
940
83
(188)
(5)
830
–
(6)
824
21.7%
2015
Total
£m
162
684
45
62
6
(154)
805
80
–
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
(14)
659
19.9%
1 Includes restructuring costs of nil (2015: nil) and £5 million (2015: £1 million) for Proprietary Capital and Fund Management respectively.
38
3i Group Annual report and accounts 2016
Strategic report
Financial review
Proprietary capital returns
Operating profit before carry on our Proprietary Capital was
£920 million (2015: £721 million) and was underpinned by strong
value growth in the portfolio and positive foreign exchange
movements which partly reversed negative foreign exchange
movements incurred in 2014 and 2015.
By business line, gross investment return on opening portfolio
value was 32% for Private Equity (2015: 24%), 8% for Infrastructure
(2015: 20%) and 6% for Debt Management (2015: loss of 7%).
Private Equity accounted for 83% of the Proprietary Capital
portfolio at 31 March 2016 (31 March 2015: 81%) and remains
the primary driver of Proprietary Capital returns.
Realised profits
Exit momentum continued in the year to 31 March 2016 with
realisation proceeds of £796 million (2015: £841 million) generating
realised profits of £72 million (2015: £162 million). Realisations,
excluding refinancings, were achieved at an uplift over opening
value of 13%, (2015: 27%), due to a number of assets being valued
on an imminent sales basis at the beginning of the year and the
sale of quoted stakes.
The majority of the realisations were from the Private Equity
portfolio, which contributed £743 million (2015: £831 million)
of this, including £185 million of refinancing proceeds
(2015: £155 million). Refinancing proceeds of £168 million were
generated by Action, whose strong cash generation meant it had
de-levered rapidly since its refinancing in January 2015. Private
Equity proceeds also included the sale of Element for £179 million
and £111 million from sales of our quoted stakes. Table 2, in the
Private Equity section, details the Private Equity realisations in the
year and sets out the accounting uplift reflected in this year’s total
return and the longer-term cash-to-cash results. The Private
Equity realisations, including refinancings and partial disposals
completed in the year, have generated a money multiple of 2.6x
over their investment life.
Proceeds of £51 million were received from 3iN, via a special
dividend, following the completion of the sale of its holding
in Eversholt Rail, and these were treated as realised proceeds.
Unrealised value movements
The unrealised value movement of £669 million (2015: £684 million)
was driven by the continued strong performance of a number of
our key assets, which more than offset market-driven weakness
in a small number of portfolio companies. Table 8 summarises
the revaluation movement by category and each category is
discussed further below.
Table 8: Unrealised profits/(losses) on revaluation of
investments for the year to 31 March
2016
£m
2015
£m
Private Equity
Earnings based valuations
Performance
Multiple movements
Other bases
Uplift to imminent sale
Discounted cash flow
Other movements on unquoted
investments
Quoted portfolio
Infrastructure
Quoted portfolio
Discounted cash flow
Debt Management
Total
460
95
13
124
5
(7)
31
(9)
(43)
669
417
64
22
89
3
46
77
(9)
(25)
684
Private Equity unrealised value growth
The Private Equity portfolio performed strongly with value
growth of £690 million in the year (2015: £641 million). This was
underpinned by good value weighted earnings growth of 17%
(2015: 19%) and a weighted multiple increase of 10% (2015: 6%),
following the re-rating of a small number of our assets. Net debt
declined to 2.9x EBITDA (31 March 2015: 3.1x) notwithstanding
the fact that Action took advantage of its strong cash generation
capability to take on additional debt at favourable terms.
The majority of the portfolio (84% by value, 2015: 93%) grew its
earnings in the year and our larger and more recent investments
continue to perform very well.
Performance
Improvements in the performance of the portfolio valued on an
earnings basis resulted in an increase in value of £460 million
(2015: £417 million). Value weighted earnings increased by 17%
in the year (2015: 19%). Action, our largest asset with over 30%
earnings growth in the 12 months to December 2015, is the
biggest contributor to this measure. Excluding Action, the value
weighted earnings growth was lower at 7% (2015: 16%) principally
due to the sale of Element, one of our largest assets with high
growth supported by its buy and build strategy and the impact
of macro-economic challenges, such as the oil and commodity
price pressure, seen in a small number of portfolio companies
(JMJ, Dynatect, Agent Provocateur, AES and Etanco). In addition,
acquisitions by our portfolio companies were fewer this year and
therefore the contribution from acquisitions to earnings growth
in 2016 was lower (2015: 2% of the 19% growth).
3i Group Annual report and accounts 2016
39
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Chart 1: Portfolio earnings growth
weighted by March 2016 carrying values1
Chart 2: Ratio of debt to EBITDA – Private Equity portfolio
weighted by March 2016 carrying values1 (£m)
Last 12 months’ (LTM) earnings growth 3i carrying value at 31 March 2016 (£m)
942
1,724
832
373
421
302
35
70
691
550
406
339
5
<(20)% (20)–(11)% (10)–(1)% 0–9%
10–19% 20–30% >30%
<1x
1–2x
2–3x
3–4x
4–5x
5–6x
>6x
1 Includes all companies valued on an earnings basis where comparable
earnings data is available. This represents 80% of the Private Equity
portfolio by value.
The value of a small number of investments was impacted by
company and geography specific issues. In total, value reductions
of £64 million, in relation to seven assets, offset the otherwise
strong performance (2015: £44 million, seven assets). The largest
single negative movement related to JMJ, a leading safety
management consultancy with a particular focus on major capital
projects for the oil and gas industry. We recognised a £19 million
value reduction on this investment in the year.
Forecast earnings, used when the outlook is lower than the last
12 months’ data, were used for only two investments at 31 March
2016, representing 7% of the portfolio by number and 3% by value
(31 March 2015: two, 6% by number and 3% by value). Chart 1
shows the earnings growth rates across the portfolio.
In the case of Action, EBITDA for valuation purposes is adjusted
to reflect its run-rate performance. Action is growing strongly due,
in part, to its successful store roll-out programme. We consider
that this run-rate methodology reflects fairly the high growth
characteristics of this business, and therefore its maintainable
earnings. At £902 million (31 March 2015: £592 million), net of the
£168 million refinancing in January 2016, Action is the largest
Private Equity investment by value, representing 24% of the
Private Equity portfolio (31 March 2015: 19%).
We took the opportunity to refinance the debt of Action and
Geka, both increasing and extending the maturity of portfolio
debt, with 82% of the overall portfolio debt now repayable in 2018
or later (31 March 2015: 81% in 2017 or later). Chart 2 shows the
ratio of net debt to EBITDA weighted by portfolio value.
1 This represents 99% of the Private Equity portfolio by value.
Multiple movements
The weighted average EBITDA multiple of the Private Equity
portfolio assets valued on an earnings basis increased from
11.2x at 31 March 2015 to 12.3x at 31 March 2016 before liquidity
discount, and from 10.5x to 11.5x after liquidity discount,
resulting in a positive movement in the year of £95 million
(2015: £64 million). Due to another year of strong performance
against its comparable set, we reviewed Action’s EBITDA multiple
and increased it by 0.5x to 14.7x pre-liquidity discount and 14.0x
post discount (31 March 2015: 14.2x, 13.5x). Based on the run-rate
earnings and capital structure at 31 March 2016, a 1.0x movement
in the EBITDA multiple applied would increase or decrease
Action’s value by £86 million. Excluding Action, the weighted
average EBITDA multiple increased to 10.8x before liquidity
discount (31 March 2015: 10.1x) and was 10.1x after liquidity
discount (31 March 2015: 9.3x). We also increased the multiple
used to value Basic-Fit to reflect its strong performance,
significant capital investment programme and a positive market
environment for discount gym operators more generally.
We continued to adjust multiples lower in 17 out of the 29
companies (31 March 2015: 22 out of 33) valued on an earnings
basis. As a matter of policy, we select an appropriate multiple for
each investment based on a comparable set of quoted companies
and adjust these comparable multiple sets with discounts and
occasionally premiums to take account of relevant size, sector,
growth and cycle considerations as appropriate. Against a volatile
market backdrop, we continued to apply a relatively high level of
adjustments to reflect our caution about longer-term and sector
multiple trends rather than taking an average of the quoted
comparable sets.
The pre-discount multiples used to value the portfolio ranged
between 6.5x and 14.7x and post-discount multiples ranged from
5.5x to 14.0x.
40
3i Group Annual report and accounts 2016
Strategic report
Financial review
Imminent sale
The exit processes for Amor and Mayborn were sufficiently
progressed to value on an imminent sales basis at 31 March 2016.
The uplift to imminent sale was £13 million (2015: £22 million).
Both sales were announced post year end and are expected
to complete by the end of June 2016.
Discounted cash flow
The largest investment valued using DCF in the Private Equity
portfolio is Scandlines, the Danish/German ferry group, which
increased in value by £122 million (2015: £94 million). Scandlines’
largest ferry route, Rødby-Puttgarden, is expected to have direct
competition from a new tunnel (the Fehmarn Belt project) at some
point in the future. In light of recent public commentary and
developments around expected potential delays to the opening
of this new tunnel, we revised our assumption as to the tunnel
opening date by three years since 31 March 2015 and two years
since 30 September 2015. This change, combined with a reduction
in the Weighted Average Cost of Capital (“WACC”), were the
primary drivers of the increase in the value of our investment in
Scandlines in the year.
Quoted portfolio
The Private Equity quoted portfolio, including IPOs completed
in the year, generated an unrealised value reduction of £7 million
(2015: £46 million gain) principally driven by our holding in Hong
Kong listed Dphone. Table 9 details the movement in the year
and closing quoted portfolio.
Infrastructure unrealised value movement
The Infrastructure portfolio consists primarily of our 34% holding
in 3iN. 3iN continued to perform well during the year, as it has an
attractive portfolio of core European assets. 3iN generated value
growth of £33 million (2015: £77 million) for 3i Group in the year,
driven by an 8% increase in the share price to 173 pence
(2015: 160 pence, 19% increase) and a total shareholder return
of 13%. This was offset by further modest falls in the value of the
Indian Infrastructure portfolio of £12 million (2015: £9 million)
as the investments continued to face a number of challenges.
Debt Management unrealised value movement
The Debt Management Proprietary Capital portfolio consists
principally of CLO equity and at 31 March 2016, 3i had invested
£151 million of proprietary capital in CLO equity (31 March
2015: £117 million). The remaining Debt Management portfolio is
comprised of direct investments in CLO warehouses, the Global
Income Fund and the Senior Loan fund.
The mark-to-market valuation of the CLO equity portfolio reduced
by £43 million (2015: £25 million) and there were a number of
other factors which contributed to this movement. We received
£31 million (2015: £16 million) of cash distributions from CLO
equity, which is included in portfolio income, resulting in an
associated value reduction. Broker quotes, which are used to
support CLO valuations, reflected general market concerns about
liquidity and investor risk appetite. In the US in particular, negative
investor sentiment around the oil and gas, commodities and
utilities sectors impacted valuations significantly. The underlying
cash flows of the CLOs remain sound, and our longer-term view
of returns remains positive.
Table 9: Quoted portfolio movement for the year to 31 March 2016
Investment
Quintiles
Dphone
Eltel
Refresco Gerber
UFO Moviez
IPO date
May 2013
July 2014
February 2015
March 2015
May 2015
Opening
value at
1 April 2015
£m1
Disposals
at opening
book value
£m
Unrealised
value
growth
£m
Other
movements
£m2
Closing value
at 31 March
2016
£m
Total gross
investment
return during
the year
£m3
144
35
47
47
27
300
(50)
–
(31)
(9)
(15)
(105)
(3)
(9)
1
5
(1)
(7)
1
(1)
3
1
1
5
92
25
20
44
12
193
–
(10)
3
9
1
3
1 For UFO Moviez, which IPOd during the year, this is the value pre-IPO.
2 Other movements relate to foreign exchange.
3 Includes realised profit/loss.
3i Group Annual report and accounts 2016
41
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Portfolio income
Portfolio income increased by 24% to £140 million
(2015: £113 million) of which £93 million was received in cash
(2015: £80 million). Dividends of £71 million were received
(2015: £45 million), including £31 million from CLO investments
(2015: £16 million), £21 million from 3iN (2015: £20 million) and
£18 million from Private Equity (2015: £9 million). Interest income
totalled £63 million (2015: £62 million), with £59 million
(2015: £56 million) generated from Private Equity investments
and £4 million (2015: £6 million) generated from investments
held in Debt Management warehouses.
Net portfolio fees of £6 million were recognised during the year
(2015: £6 million) from new Private Equity investments and
monitoring fees.
Net foreign exchange movements
The net foreign exchange gain of £157 million in the year
(2015: £114 million loss) reflects the translation of non-sterling
denominated portfolio assets and non-portfolio net assets,
including cash and gross debt held at the balance sheet date.
This movement reflects the strengthening of the euro (9.1%)
against sterling over the year.
The net assets of the Group by currency and the sensitivity for
further currency movements are shown in Table 10 below.
Table 10: Net assets of the Group by currency and sensitivity
at 31 March 2016
Sterling
Euro
US dollar
Swedish krona
Other
£m
1,364
2,169
726
106
90
% 1% sensitivity
31
49
16
2
2
n/a
22
7
1
n/a
Proprietary Capital costs
A proportion of the Group’s operating expenses that are
assessed as having been incurred in running a regulated and
listed investment trust are allocated to Proprietary Capital.
These costs include 100% of costs in relation to the CEO and
Group Finance Director and elements of finance, IT, property
and compliance. Operating expenses were broadly stable
at £31 million (2015: £32 million) as the Group continued
to manage costs closely.
Synthetic fees, the internal fee payable to the Fund Management
business for managing the Group’s Proprietary Capital, of
£44 million (2015: £45 million) reflect the lower level of Proprietary
Capital being managed as a result of net divestment activity,
predominantly in Private Equity.
Net interest payable
Gross interest payable declined to £47 million (2015: £49 million)
due to the reduced costs associated with the revolving credit
facility which was refinanced in September 2014.
The current gross debt position is detailed further in the Balance
sheet section of this Financial review and in Note 16 of the
financial statements.
Cash interest received increased marginally to £4 million
(2015: £3 million).
Fund Management returns
This year the Board agreed to remove Fund Management
profitability as a KPI. While Fund Management profitability is
still monitored when managing the individual business lines to
ensure cost discipline, our decision not to raise a new Private
Equity fund means that it is no longer expected to be a material
driver of the Group’s performance.
The Group’s Fund Management income is driven by total
AUM, which was £14.0 billion at 31 March 2016 (31 March
2015: £13.5 billion). The closing of four CLOs and the launch
of the Global Income Fund, and further commitments to the
European Middle Market Fund and US Senior Loan Fund in the
Debt Management business offset a fall in AUM arising from
net divestment activity in Private Equity and the special dividend
from 3iN. The proportion of third-party assets under management
increased marginally to 76% (31 March 2015: 75%).
The Fund Management business generated an operating
profit before carry of £20 million and an operating profit margin
of 16% (2015: £26 million, 21%). Fee income declined marginally
to £123 million (2015: £125 million) due to reduced third-party
Private Equity AUM. Operating expenses increased marginally to
£103 million (2015: £99 million), principally due to the redundancy
costs noted in the Private Equity business line section.
42
3i Group Annual report and accounts 2016
Strategic report
Financial review
Table 11: Fund Management profit for the year to 31 March
2016
£m
2015
£m
Fees receivable from external funds
Private Equity
Infrastructure
Debt Management
Synthetic fees
Private Equity
Infrastructure
Debt Management
Total fee income
Fund Management operating expenses
Operating profit before carry
13
28
38
41
3
–
123
(103)
20
16
30
34
42
3
–
125
(99)
26
Table 12: Carried interest and performance fees
by business line for the year to 31 March
2016
£m
2015
£m
Carried interest and performance
fees receivable
Private Equity
Infrastructure
Debt Management
Total
Carried interest and performance
fees payable
Private Equity
Infrastructure
Debt Management
Total
58
20
5
83
(171)
(15)
(2)
(188)
Carried interest and performance fees payable
Our largest Private Equity fund, Eurofund V, which includes
investments made in 2007–12, reached its performance hurdle on
a valuation basis in FY2016. We have seen a strong recovery in the
fund’s multiple to 1.7x (31 March 2015: 1.4x) principally due to the
performance of Action and Scandlines, as well as the realisations
of Element and Amor. As a result, we are now accruing carried
interest receivable from this fund for the first time and £63 million
was recognised in the year (2015: nil). This is calculated assuming
that the portfolio was realised at the 31 March 2016 valuation.
We pay carried interest to our investment teams on proprietary
capital invested and share a proportion of carried interest
receivable from third-party funds. In Private Equity, we typically
accrue carried interest payable at between 10–15% of gross
investment return. The improved performance over the last
12 months means that the majority of assets by value are now held
in schemes that would have met their performance hurdles,
assuming that the portfolio was realised at the 31 March 2016
valuation. We accrued carried interest payable of £171 million
(2015: £103 million) for Private Equity in the year, of which
£48 million relates to the team’s share of carry receivable from
Eurofund V (2015: nil).
28
45
7
80
(103)
(35)
(4)
(142)
3iN pays a performance fee based on 3iN’s NAV on an annual
basis, subject to a hurdle rate of return and a high-water mark.
The continued good performance of the European assets held
by 3iN resulted in the recognition of £20 million of performance
fees receivable in the year (2015: £45 million). Carry payable to
the Infrastructure team of £15 million (2015: £35 million) has
been accrued.
Carry is only paid once the hurdles are passed in cash terms and
the cash proceeds are actually received following a realisation or
refinancing event. During the year, £15 million was paid
(2015: £7 million).
In total at 31 March 2016, balance sheet carried interest and
performance fees payable increased to £404 million (31 March
2015: £227 million) and the receivable increased to £122 million
(31 March 2015: £88 million).
Pension
The valuation of assets of the Group’s defined benefit pension
schemes was impacted by the volatility in financial markets during
the year. The liability of the Group’s defined benefit pension
scheme declined in the year following an increase in the
discount rate. On a net basis, these movements resulted in
a re-measurement loss of £6 million (2015: £14 million loss) for
the year. On an IAS19 basis the pension scheme remains
in a significant surplus.
3i Group Annual report and accounts 2016
43
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
The 2013 triennial valuation of the UK defined benefit pension
scheme was completed in March 2014. It resulted in a very small
surplus and consequently no further contributions were made,
or are planned, as a result of this valuation. The next triennial
valuation will be based on the pension scheme’s funding
position at 30 June 2016.
We launched a programme to offer our members flexibility
in how they take their pension benefits following the
implementation of HM Treasury’s “Freedom and Choice in
Pensions” changes. This included providing financial advice
and a range of options for deferred and pensioner members.
Tax
The Group’s parent company is an approved investment trust
company for UK tax purposes. Approved investment trust
companies are used as investment fund vehicles. The tax
exemption for capital profits from which they benefit ensures that
investors do not suffer double taxation of their investment returns.
The majority of our returns are capital returns for tax purposes
(realised profits, fair value adjustments and impairment losses)
and are substantially non-taxable. As a result, the Group’s tax
charge in the year was nil (2015: £4 million).
Table 13: Operating cash profit for the year to 31 March
Third-party capital fees
Cash portfolio fees
Cash portfolio dividends and interest
Cash income
Total operating expenses1
Less: Restructuring costs2
Operating expenses excluding
restructuring costs
Operating cash profit
2016
£m
78
7
86
171
134
–
134
37
2015
£m
78
10
70
158
131
(1)
130
28
1 Operating expenses are stated on an accrual basis.
2 Operating cash profit in FY16 has not been adjusted for restructuring costs.
Operating cash profit
Third-party fees received remained broadly flat during the year,
as the launch of four Debt Management CLOs and the Global
Income Fund largely offset the reduction in fees from our Private
Equity funds. Increased investment into cash yielding Debt
Management funds has generated good income and the Private
Equity portfolio generated a higher level of dividend income.
Consequently, the Group was able materially to improve its
operating cash income to £171 million (2015: £158 million) despite
the net divestment activity in Private Equity.
Total operating expenses increased by 2% to £134 million
(2015: £131 million), while restructuring costs, which comprise
redundancy, office closures and organisational changes, increased
to £5 million (2015: £1 million). Excluding restructuring and
redundancy costs, operating expenses were stable at £129 million
(2015: £130 million) despite some strategic recruitment into our
investment teams in the second half of the year. Operating
expenses as a percentage of weighted average AUM remained
stable at 1.0% (2015: 1.0%), as a result of the continuing cost focus.
We expect costs to rise marginally as we continue to grow the
business, increase activity and deal with increased regulation,
but we expect costs to remain at c.1.0% of AUM.
In total, the operating cash profit position, including this year’s
restructuring costs, increased significantly to £37 million
(2015: £28 million).
Cash flow
Investment and realisations
Proceeds from realisations were £796 million (2015: £841 million),
of which £25 million was receivable at 31 March 2016. Cash
proceeds of £771 million were offset partly by cash investment
of £453 million (2015: £474 million) and resulted in net cash inflow
of £318 million (2015: £367 million). A further £99 million
of investment was non-cash due to capitalised interest
(2015: £140 million) and total investment was £552 million
(2015: £614 million).
Further detail on investment and realisations is included in the
relevant business line sections.
Table 14: Investment activity – Proprietary Capital and Third-party Capital for the year to 31 March
Realisations
Cash investment
Net cash divestment
Non-cash investment
Net divestment
Proprietary Capital
Proprietary and
Third-party Capital
2016
£m
771
(453)
318
(99)
219
2015
£m
841
(474)
367
(140)
227
2016
£m
1,327
(494)
833
(133)
700
2015
£m
1,363
(562)
801
(191)
610
44
3i Group Annual report and accounts 2016
Strategic report
Financial review
Balance sheet
Table 15: Simplified balance sheet as at 31 March
Investment portfolio value
Gross debt
Cash and deposits
Net cash
Other net liabilities
Net assets
Gearing
2016
£m
4,497
(837)
1,002
165
(207)
4,455
nil
2015
£m
3,877
(815)
864
49
(120)
3,806
nil
The proprietary capital portfolio increased to £4,497 million at
31 March 2016 (31 March 2015: £3,877 million) as cash investment
of £453 million, unrealised value growth of £669 million and
foreign exchange movements of £188 million outweighed the
good level of realisations.
Gross debt includes a euro denominated bond of £262 million
(31 March 2015: £240 million) which matures on 17 March 2017.
We expect to repay that bond out of cash resources.
Net divestment activity and an operating cash profit led to cash
and deposits on the balance sheet increasing to £1,002 million
(31 March 2015: £864 million). After allowing for an increase in the
sterling equivalent of the 2017 euro denominated bond, the
Group was in a net cash position of £165 million at 31 March 2016
(31 March 2015: £49 million net cash). Gearing remained at nil at
31 March 2016 (31 March 2015: nil).
Liquidity
Liquidity remained strong at £1,352 million (31 March
2015: £1,214 million) and comprised cash and deposits
of £1,002 million (31 March 2015: £864 million) and undrawn
facilities of £350 million (31 March 2015: £350 million).
Foreign exchange hedging
Although derivatives are not used to hedge currency movements
on a portfolio basis, we do hedge individual investment
acquisitions or divestments where appropriate. Foreign exchange
risk is considered an integral part of the investment process.
Diluted NAV
The diluted NAV per share at 31 March 2016 was 463 pence
(31 March 2015: 396 pence). This was driven by the total return
in the year of £824 million (2015: £659 million) and partially offset
by dividend payments in the year of £190 million, or 20.0 pence
per share (2015: £183 million, 19.3 pence per share).
Dividend
The Board has declared a total dividend of 22 pence (2015:
20.0 pence) for 2016. This comprises an 8.1 pence base dividend
and a 13.9 pence additional dividend. Due to our current net
divestment activity and robust balance sheet, we have proposed
an additional dividend above the top end of our 15%–20%
distribution range, that will result in the total dividend for 2016
being 27% of gross cash realised proceeds. Following payment
of an interim dividend of 6.0 pence per share in January 2016,
and subject to shareholder approval, we will pay the final dividend
of 16.0 pence (2015: 14.0 pence) on 22 July 2016 to shareholders
on the register at 17 June 2016.
Key accounting judgements and estimates
In preparing these accounts, the key accounting judgement
estimate relates to the carrying value of our investment assets
which are stated at fair value.
Given the importance of this area, the Board has a separate
Valuations Committee to review the valuations policies, process
and application to individual investments. However, asset
valuations for non-quoted investments are inherently
subjective, as they are made on the basis of assumptions which
may not prove to be accurate. At 31 March 2016, 85% of the
investment assets were non-quoted (31 March 2015: 80%).
Accounting for investment entities: an assessment is required
to determine the degree of control or influence the Group
exercises and the form of any control to ensure that the
financial treatment is accurate. IFRS 10 has resulted in a number
of intermediate holding companies being presented at fair
value, which has led to reduced transparency of the underlying
investment performance. As a result, the Group continues to
present an alternative non-GAAP investment basis set of
financial statements to ensure that the commentary in the
Strategic report remains fair, balanced and understandable.
Investment basis
3i Group Annual report and accounts 2016
45
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Consolidated statement of comprehensive income
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable
Foreign exchange gain/(loss) on investments
Gross investment return
Fees receivable from external funds
Operating expenses
Interest receivable
Interest payable
Movement in the fair value of derivatives
Foreign exchange (loss)/gain
Operating profit before carry
Carried interest
Carried interest and performance fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Profit for the year
Other comprehensive income
Re-measurements of defined benefit plans
Total comprehensive income for the year (“Total return”)
Total
2016
£m
72
669
71
63
6
188
1,069
79
(134)
4
(47)
–
(31)
940
83
(188)
(5)
830
–
830
(6)
824
Total
2015
£m
162
684
45
62
6
(154)
805
80
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
673
(14)
659
46
3i Group Annual report and accounts 2016
Strategic report
Investment basis
Consolidated statement of financial position
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investment portfolio
Carried interest and performance fees receivable
Other non-current assets
Intangible assets
Retirement benefit surplus
Property, plant and equipment
Deferred income taxes
Total non-current assets
Current assets
Carried interest and performance fees receivable
Other current assets
Deposits
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
Current income taxes
Provisions
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Other reserves
Own shares
Total equity
Total
2016
£m
Total
2015
£m
658
3,839
4,497
94
37
12
132
5
3
4,780
28
53
40
962
1,083
5,863
(27)
(290)
–
(575)
(20)
(2)
(1)
(915)
(107)
(114)
(1)
(262)
(2)
(7)
(493)
(1,408)
4,455
719
784
3,006
(54)
4,455
763
3,114
3,877
43
21
19
136
4
3
4,103
45
64
–
864
973
5,076
(25)
(214)
(10)
(815)
(19)
(3)
(5)
(1,091)
(144)
(13)
(17)
–
(2)
(3)
(179)
(1,270)
3,806
719
784
2,382
(79)
3,806
Investment basis
Consolidated cash flow statement
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Cash divestment from traded portfolio
Net cash flow from derivatives
Portfolio interest received
Portfolio dividends received
Portfolio fees received
Fees received from external funds
Carried interest and performance fees received
Carried interest and performance fees paid
Acquisition related earn-out charges paid
Operating expenses
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Issue of shares
Repurchase of B shares
Dividend paid
Interest received
Interest paid
Net cash flow from financing activities
Cash flow from investing activities
Purchase of property, plant and equipment
Net cash flow from deposits
Net cash flow from investing activities
Change in cash and cash equivalents
Cash and cash equivalents at the start of year
Effect of exchange rate fluctuations
Cash and cash equivalents at the end of year
3i Group Annual report and accounts 2016
47
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Total
2016
£m
Total
2015
£m
(449)
771
–
(14)
15
71
7
78
52
(15)
(30)
(134)
–
352
–
–
(190)
4
(51)
(237)
(1)
(40)
(41)
74
864
24
962
(474)
841
21
9
26
44
10
78
6
(13)
(10)
(117)
(5)
416
3
(6)
(183)
3
(54)
(237)
–
–
–
179
697
(12)
864
48
3i Group Annual report and accounts 2016
Strategic report
Reconciliation of Investment basis to IFRS
Background to Investment basis
financial statements
The Group makes investments in portfolio companies directly,
held by 3i Group plc, and indirectly, held through intermediate
holding company and partnership structures (“Investment entity
subsidiaries”). It also has other operational subsidiaries which
provide services and other activities such as employment,
regulatory activities, management and advice (“Trading
subsidiaries”). The application of IFRS 10 requires us to fair value
a number of intermediate holding companies that were previously
consolidated line by line. This fair value approach, applied at the
intermediate holding company level, effectively obscures the
performance of our proprietary capital investments and
associated transactions occurring in the intermediate holding
companies. The financial effect of the underlying portfolio
companies and fee income, operating expenses and carried
interest transactions occurring in Investment entity subsidiaries
are aggregated into a single value. Other items which were
previously eliminated on consolidation are now
included separately.
As a result we introduced separate non-GAAP “Investment basis”
Statements of comprehensive income, financial position and cash
flow in our 2014 Annual report and accounts to aid understanding
of our results. The Strategic report is also prepared using the
Investment basis as we believe it provides a more understandable
view of our performance. Total return and net assets are equal
under the Investment basis and IFRS; the Investment basis is
simply a “look through” of IFRS 10 to present the underlying
performance. The two diagrams below illustrate these changes,
together with an illustrative example to show how information can
be aggregated.
Reconciliation between Investment basis and IFRS
A detailed reconciliation from the Investment basis to IFRS basis
of the Statement of comprehensive income, Statement of financial
position and Cash flow statement is shown on pages 49 to 52.
Investment basis of consolidation
IFRS 10 basis of consolidation
3i Group plc
The Group
3i Group plc
The Group
Investment
entity
subsidiaries
Portfolio
companies
Inter-company
balance
eliminated on
consolidation
Trading
subsidiaries
(regulated
investment
advisers,
employment
entities, etc.)
Portfolio
companies
(held directly
by 3i Group
plc)
Investment
entity
subsidiaries
Portfolio
companies
Inter-company
balance
Trading
subsidiaries
(regulated
investment
advisers,
employment
entities, etc.)
Portfolio
companies
(held directly
by 3i Group
plc)
3i Group Annual report and accounts 2016
49
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Reconciliation of consolidated statement
of comprehensive income
Realised profits over value on the
disposal of investments
Unrealised profits on the revaluation
of investments
Fair value movements on investment
entity subsidiaries
Portfolio income
Dividends
Income from loans and receivables
Fees receivable
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Operating expenses
Interest receivable
Interest payable
Movement in the fair value of derivatives
Exchange movements
(Expense)/income from investment
entity subsidiaries
Operating profit before carry
Carried interest
Carried interest and performance
fees receivable
Carried interest and performance
fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Profit for the year
Other comprehensive income
Exchange differences on translation
of foreign operations
Re-measurements of defined
benefit plans
Total comprehensive income
for the year (“Total return”)
Investment
basis
2016
£m
IFRS
adjustments
2016
£m
Notes
IFRS
basis
2016
£m
Investment
basis
2015
£m
IFRS
adjustments
2015
£m
IFRS
basis
2015
£m
1, 2
1, 2
1
1, 2
1, 2
1, 2
1, 3
1, 4
1, 4
1, 3
1
1, 4
1, 4
1, 4
1, 3
72
669
–
71
63
6
188
1,069
79
(134)
4
(47)
–
(31)
–
940
83
(188)
(5)
830
–
830
–
(6)
824
(61)
(577)
591
(13)
(37)
2
(147)
(242)
–
2
–
–
–
96
(10)
(154)
(5)
148
–
(11)
(2)
(13)
13
–
–
11
92
591
58
26
8
41
827
79
(132)
4
(47)
–
65
(10)
786
78
(40)
(5)
819
(2)
817
13
(6)
824
162
684
–
45
62
6
(154)
805
80
(131)
3
(49)
(1)
40
–
747
80
(142)
(8)
677
(4)
673
–
(14)
659
(108)
(448)
530
(9)
(24)
–
105
46
–
9
–
–
–
(101)
1
(45)
–
70
–
25
2
27
(27)
–
–
54
236
530
36
38
6
(49)
851
80
(122)
3
(49)
(1)
(61)
1
702
80
(72)
(8)
702
(2)
700
(27)
(14)
659
Notes:
1 Applying IFRS 10 to the Statement of comprehensive income consolidates the line items of a number of previously consolidated subsidiaries into a single
line item “Fair value movements on investment entity subsidiaries”. In the “Investment basis” accounts we have disaggregated these line items to analyse
our total return as if these Investment entity subsidiaries were fully consolidated, consistent with prior years. The adjustments simply reclassify the
Statement of comprehensive income of the Group, and the total return is equal under the Investment basis and the IFRS basis.
2 Realised profits, unrealised profits, and portfolio income shown in the IFRS accounts only relate to portfolio companies that are held directly by 3i Group
plc and not those portfolio companies held through Investment entity subsidiaries. Realised profits, unrealised profits, and portfolio income in relation to
portfolio companies held through Investment entity subsidiaries are aggregated into the single “Fair value movement on investment entity subsidiaries”
line. This is the most significant reduction of information in our IFRS accounts.
3 Foreign exchange movements have been reclassified under the Investment basis as foreign currency asset and liability movements. Movements within the
Investment entity subsidiaries are included within “Fair value movements on investment entities”.
4 Other items also aggregated into the “Fair value movements on investment entity subsidiaries” line include fees receivable from external funds, audit fees,
custodian fees, bank charges, other general and administration expenses, carried interest and tax.
The IFRS basis is audited and the Investment basis is unaudited. The external Auditor states in its Audit report on pages 140 to 145 that the information given
in the FY2016 Strategic report and the Corporate Governance report is consistent with the financial statements.
50
3i Group Annual report and accounts 2016
Strategic report
Reconciliation of Investment basis to IFRS
Reconciliation of consolidated statement of financial position
Investment
basis
2016
£m
IFRS
adjustments
2016
£m
Notes
IFRS
basis
2016
£m
Investment
basis
2015
£m
IFRS
adjustments
2015
£m
IFRS
basis
2015
£m
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investments in investment entity subsidiaries
Investment portfolio
Carried interest and
performance fees receivable
Other non-current assets
Intangible assets
Retirement benefit surplus
Property, plant and equipment
Deferred income taxes
Total non-current assets
Current assets
Carried interest and
performance fees receivable
Other current assets
Deposits
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
Current income taxes
Provisions
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Other reserves
Own shares
Total equity
1
1
1, 3
1
1
1, 2
1
1
1
1
4
The Notes relating to the table above are on the opposite page.
658
3,839
–
4,497
94
37
12
132
5
3
4,780
28
53
40
962
1,083
5,863
(27)
(290)
–
(575)
(20)
(2)
(1)
(915)
(107)
(114)
(1)
(262)
(2)
(7)
(493)
(1,408)
4,455
719
784
3,006
(54)
4,455
(361)
(2,596)
2,680
(277)
(5)
–
–
–
–
–
(282)
–
(22)
–
(5)
(27)
(309)
–
205
–
–
–
2
–
207
8
94
–
–
–
–
102
309
–
–
–
–
–
–
297
1,243
2,680
4,220
89
37
12
132
5
3
4,498
28
31
40
957
1,056
5,554
(27)
(85)
–
(575)
(20)
–
(1)
(708)
(99)
(20)
(1)
(262)
(2)
(7)
(391)
(1,099)
4,455
719
784
3,006
(54)
4,455
763
3,114
–
3,877
43
21
19
136
4
3
4,103
45
64
–
864
973
5,076
(25)
(214)
(10)
(815)
(19)
(3)
(5)
(1,091)
(144)
(13)
(17)
–
(2)
(3)
(179)
(1,270)
3,806
719
784
2,382
(79)
3,806
(364)
(1,842)
2,079
(127)
–
–
–
–
–
–
(127)
–
(31)
–
(3)
(34)
(161)
–
142
–
–
–
2
–
144
17
–
–
–
–
–
17
161
–
–
–
–
–
–
399
1,272
2,079
3,750
43
21
19
136
4
3
3,976
45
33
–
861
939
4,915
(25)
(72)
(10)
(815)
(19)
(1)
(5)
(947)
(127)
(13)
(17)
–
(2)
(3)
(162)
(1,109)
3,806
719
784
2,382
(79)
3,806
3i Group Annual report and accounts 2016
51
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Notes:
1 Applying IFRS 10 to the Statement of financial position aggregates the line items into the single line item “Investment in investment entities”. In the
Investment basis we have disaggregated these items to analyse our net assets as if the Investment entity subsidiaries were consolidated. The adjustment
reclassifies items in the Statement of financial position. There is no change to the net assets, although for reasons explained below, gross assets and gross
liabilities are different.
The disclosure relating to portfolio companies is significantly reduced by the aggregation, as the fair value of all investments held by Investment entity
subsidiaries is aggregated into the “Investments in investment entities” line. We have disaggregated this fair value and disclosed the underlying portfolio
holding in the relevant line item, ie, quoted equity investments or unquoted equity investments.
Other items which may be aggregated are carried interest and other payables, and the Investment basis presentation again disaggregates these items.
2 Cash balances held in Investment entity subsidiaries are also aggregated into the “Investment in investment entities” line. At 31 March 2016 £5 million
(2015: £3 million) of cash was held in subsidiaries that are now classified as Investment entity subsidiaries and is therefore included in the “Investment in
investment entities” line.
3 Intercompany balances between Investment entity subsidiaries and trading subsidiaries also impact the transparency of our results under the IFRS
basis. If an Investment entity subsidiary has an intercompany balance with a consolidated trading subsidiary of the Group, then the asset or liability of
the Investment entity subsidiary will be aggregated into its fair value, while the asset or liability of the consolidated trading subsidiary will be disclosed
as an asset or liability in the Statement of financial position for the Group. Prior to the adoption of IFRS 10, these balances would have been eliminated
on consolidation.
4 Investment basis financial statements are prepared for performance measurement and therefore reserves are not analysed separately under this basis.
The IFRS basis is audited and the Investment basis is unaudited. The external Auditor states in its Audit report on pages 140 to 145 that the information given
in the FY2016 Strategic report and the Corporate Governance report is consistent with the financial statements.
52
3i Group Annual report and accounts 2016
Strategic report
Reconciliation of Investment basis to IFRS
Reconciliation of consolidated cash flow statement
Investment
basis
2016
£m
IFRS
adjustments
2016
£m
Notes
IFRS
basis
2016
£m
Investment
basis
2015
£m
IFRS
adjustments
2015
£m
IFRS
basis
2015
£m
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Cash divestment from traded portfolio
Cash inflow from investment entity subsidiaries
Net cash flow from derivatives
Portfolio interest received
Portfolio dividends received
Portfolio fees received
Fees received from external funds
Carried interest and performance
fees received
Carried interest and performance fees paid
Acquisition related earn-out charges paid
Operating expenses
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Dividend paid
Issue of shares
Repurchase of B shares
Interest received
Interest paid
Net cash flow from financing activities
Cash flow from investing activities
Purchase of property, plant and equipment
Net cash flow from deposits
Net cash flow from investing activities
Change in cash and cash equivalents
Cash and cash equivalents at the start of year
Effect of exchange rate fluctuations
Cash and cash equivalents at the end of year
1
1
1
1
1
1
1
1
1
1
2
2
1
2
(449)
771
–
–
(14)
15
71
7
78
52
(15)
(30)
(134)
–
352
(190)
–
–
4
(51)
(237)
(1)
(40)
(41)
74
864
24
962
362
(535)
–
206
–
(10)
(13)
–
–
–
2
–
–
–
12
–
–
–
–
–
–
–
–
–
12
(3)
(14)
(5)
(87)
236
–
206
(14)
5
58
7
78
52
(13)
(30)
(134)
–
364
(190)
–
–
4
(51)
(237)
(1)
(40)
(41)
86
861
10
957
(474)
841
21
–
9
26
44
10
78
6
(13)
(10)
(117)
(5)
416
(183)
3
(6)
3
(54)
(237)
–
–
–
179
697
(12)
864
358
(571)
(21)
272
–
(12)
(9)
–
(1)
–
(1)
–
1
–
16
–
–
–
–
–
–
–
–
–
16
(23)
4
(3)
(116)
270
–
272
9
14
35
10
77
6
(14)
(10)
(116)
(5)
432
(183)
3
(6)
3
(54)
(237)
–
–
–
195
674
(8)
861
Notes:
1 The Consolidated cash flow statement is impacted by the application of IFRS 10 as cash flows to and from Investment entity subsidiaries are disclosed,
rather than the cash flows to and from the underlying portfolio.
Therefore in our Investment basis financial statements, we have disclosed our cash flow statement on a “look through” basis, in order to reflect the
underlying sources and uses of cash flows and disclose the underlying investment activity.
2 There is a difference between the change in cash and cash equivalents of the Investment basis financial statements and the IFRS financial statements
because there are cash balances held in Investment entity subsidiary vehicles. Cash held within Investment entity subsidiaries will not be shown in the
IFRS statements but will be seen in the Investment basis statements.
The IFRS basis is audited and the Investment basis is unaudited. The external Auditor states in its Audit report on pages 140 to 145 that the information given
in the FY2016 Strategic report and the Corporate Governance report is consistent with the financial statements.
Strategic report
Corporate responsibility
3i is committed to acting as a
responsible company, a responsible
employer and a responsible investor.
We take responsibility for our actions,
carefully consider how others will be
affected by our choices and ensure
that our values and ethics are
integrated into our formal business
policies, practices and plans.
This section aims to provide a brief summary of our
approach to corporate responsibility.
For more information, please see our Corporate
responsibility report, available on our website.
Further information on our approach to corporate
responsibility, including summaries of relevant policies,
can also be found on our website.
3i.com/corporate-responsibility
3i Group Annual report and accounts 2016
53
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
A responsible company
Governance
Good corporate governance is fundamental to 3i and its activities
and is critical to the delivery of value to our stakeholders. For full
details of our governance structure and processes, please see the
Corporate Governance section of this report.
Transparency
As a publicly-listed company, 3i operates within a framework
of formal legal and regulatory disclosure requirements as well
as meeting the high expectations for transparency of our
shareholders, fund investors, staff and the media. We are
committed to communicating both our financial and non-financial
performance in a clear, open and comprehensive manner.
Anti-bribery and corruption
3i does not offer, pay or accept bribes and we only work with third
parties whose standards of business integrity are substantively
consistent with ours. We expect the businesses we invest in to
operate in compliance with all applicable laws and regulations and,
where appropriate, work towards meeting relevant international
standards where these are more stringent. This includes, in
particular, upholding high standards of business integrity, avoiding
corruption in all its forms and complying with applicable anti-
bribery, anti-fraud and anti-money laundering laws and regulations.
Environmental impact
This section has been prepared in accordance with our regulatory
obligation to report greenhouse gas (“GHG”) emissions pursuant
to Section 7 of the Companies Act 2006 (Strategic Report and
Directors’ Report) Regulations 2013.
During the year to 31 March 2016, our measured Scope 1 and 2
emissions (location-based) totalled 1,106.6 tCO2e. This comprised:
Scope
1
2
2
Location-based
Market-based1
FY2016
252.4 tCO2e
854.2 tCO2e
544.4 tCO2
FY2015
(restated)
247.3 tCO2e
899.0 tCO2e
N/A
1 Emissions from the consumption of electricity outside the UK and emissions
from purchased electricity are calculated using the market-based approach
using supplier-specific emission factors are reported in tCO2 rather than
tCO2e due to the availability of emission factors.
This is equivalent to 4.0 tCO2e per full-time equivalent employee,
based on an average of 276 employees during the year (2015: 4.2
tCO2e; 271 employees).
We have restated the emissions figures for the year to 31 March
2015 to reflect improved data collection. Overall our Scope 1 and
2 emissions decreased by 3% in the year.
Our emissions have been verified by an external third party
according to the ISO 14064-3 standard.
54
3i Group Annual report and accounts 2016
Strategic report
Corporate responsibility
We quantify and report our organisational GHG emissions in
alignment with the World Resources Institute’s Greenhouse Gas
Protocol Corporate Accounting and Reporting Standard and in
alignment with the new Scope 2 Guidance, which is the most
significant update to the Corporate Standard since its inception.
We consolidate our organisational boundary according to the
operational control approach, which includes all our offices.
We have adopted a materiality threshold of 5% for GHG reporting
purposes. The GHG sources that constituted our operational
boundary for the year to 31 March 2016 are:
– Scope 1: natural gas combustion within boilers and fuel
combustion within leased vehicles; and
– Scope 2: purchased electricity and heat consumption for our
own use.
In some cases, where data is missing, values have been estimated
using either extrapolation of available data or data from the
previous year as a proxy.
The new Scope 2 Guidance requires that we quantify and report
Scope 2 emissions according to two different methodologies
(“dual reporting”): (i) the location-based method, using average
emissions factors for the country in which the reported operations
take place; and (ii) the market-based method, which uses the
actual emissions factors of the energy procured.
Whilst we have a very low footprint on the environment, we are
committed to reducing it further. In our London office, where
approximately two-thirds of our employees are based, we are
supplied by EDF Energy, which has a cleaner fuel mix than the UK
average. The dual reporting of our emissions demonstrates the
impact that procuring energy from suppliers with lower emissions
has on our greenhouse gas emissions, as reflected in our lower
Scope 2 market-based emissions figure.
As part of compliance with the UK Energy Savings Opportunities
Scheme (“ESOS”), we have identified further savings which
could lead to a reduction in electricity consumption at our
London office.
Our efforts to minimise our carbon footprint have been
recognised externally and 3i was the recipient of a Bronze Award
from the London Mayor’s 2015 Business Energy Challenge, which
recognises businesses’ efforts to cut energy use from their
London locations.
We report our GHG emissions and climate change data to the
CDP. In addition to this, we are preparing to report in accordance
with the Global Reporting Initiative (“GRI”) Sustainability
Reporting Framework, G4, at the Core level for the year ending
31 March 2017.
Community
We focus our charitable activities on the disadvantaged, on young
people and on education. Charities are supported on the basis of
their effectiveness and impact. We also support staff giving and
sponsorship through matching donations. Our charitable giving
for the year to 31 March 2016 totalled £324,009. For more
information, see our Corporate responsibility report.
A responsible employer
Human rights
Whilst 3i does not have a formal human rights policy, our policies
are consistent with internationally-proclaimed human rights
principles. In particular, 3i is an equal opportunities employer and
has clear grievance and disciplinary procedures, an employee
assistance programme and an independent, external “whistle
blowing” hotline service.
We are committed to ensuring that the businesses we invest in
comply with all applicable laws in relation to their employees
(amongst other things) and, where appropriate, that they work
towards meeting relevant international standards (such as the
ILO Fundamental Conventions) where those are more stringent.
Summaries of relevant 3i policies, including our policies on
people, recruitment and selection, equal opportunities and
diversity, health and safety and responsible investment are
available at www.3i.com. 3i will publish on its website a slavery
and human trafficking statement, as required by section 54 of the
Modern Slavery Act 2015, on or before 30 September 2016.
At 31 March 2016, 3i had a total of 281 employees (calculated under
the investment basis). The breakdown by gender is as follows:
(number)
All 3i employees
3i Group Directors1
Senior managers2
Total
Male
Female
281
8
46
174
5
36
107
3
10
1 Includes non-executive Directors who are not 3i employees.
2 “Senior managers” excludes Simon Borrows and Julia Wilson (who are
included as Directors of 3i Group plc) and includes 28 people who were
directors of undertakings included in the consolidated Group accounts,
of whom 24 are male and 4 are female.
3i Group Annual report and accounts 2016
55
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Employee engagement
Honest communication with our staff is important to us. To this
end, we encourage a culture of open communication between
our employees and senior and executive management. We
benefit from being a small organisation, operating in a relatively
flat structure, with few hierarchies. The members of our Executive
Committee have an open-door policy and know most employees
by name.
We promote and facilitate the ownership of 3i shares among
employees through variable compensation or share investment
plans. As a result, most of our employees are shareholders in the
Company and feel invested in the success of the organisation.
We pride ourselves on the engagement and the sense of
ownership we have fostered over the years, which has resulted in
low unplanned turnover rates.
Graduate training scheme
We launched our new graduate recruitment scheme in 2015,
which is designed to develop our next generation of world-class
investment professionals and business leaders. Our first five
graduate analysts joined us in 2015, and a further five will join us in
September 2016. The programme consists of comprehensive and
high-quality training, followed by rotations through each of our
Private Equity, Infrastructure and Debt Management businesses
as well as our Strategy and Finance teams.
A responsible investor
As a company, we have a relatively small footprint on many
corporate responsibility issues. However, with assets under
management of £14 billion, we recognise that our decisions as an
investor potentially matter to a broad range of people.
We believe that:
– the effective assessment of ESG matters has a positive effect
on the value of our investee companies and of 3i Group itself;
– compliance with local laws and regulations may not be enough
to meet global expectations, deliver value and enhance our
reputation and licence to operate; and
– it is vital that we seek to identify all material ESG risks and
opportunities through our due diligence and effectively
manage them during the period of 3i’s investment.
UNPRI
Since 2011, we have been signatories to the UN Principles for
Responsible Investment. We also have a clear and comprehensive
Responsible Investment policy which is embedded into our
investment and portfolio monitoring processes. In our experience,
companies with high ESG standards are typically better run,
create fewer business risks and ultimately deliver better value.
Our Responsible Investment policy
Our detailed Responsible Investment policy sets out the
businesses and activities in which 3i will not invest, as well as
minimum standards in relation to ESG matters which we expect
potential new portfolio companies to meet, or to commit to
meeting over a reasonable time period.
We will use our influence as an investor to promote a commitment
in our investee companies to:
– comply, as a minimum, with applicable local and international
laws and regulations and, where appropriate, relevant
international standards (such as the IFC Performance Standards
and the ILO Fundamental Conventions), where these are more
stringent than applicable laws;
– mitigate any adverse environmental and social impacts and
enhance positive effects on the environment, workers and
relevant stakeholders; and
– uphold high standards of business integrity and good corporate
governance.
Our Responsible Investment policy has been integrated into our
investment and portfolio management processes and procedures
and is supported by detailed guidance notes, a global network
of specialist external advisers and dedicated internal resource.
A summary of our Responsible Investment policy is available on
our website.
For more information on our approach to Responsible Investing,
including a summary of our Responsible Investment policy,
please visit www.3i.com/corporate-responsibility/
a-responsible-investor/responsible-investment
Corporate Governance
p57
Corporate responsibility report
www.3i.com/corporate-responsibility
Corporate responsibility policies
www.3i.com/corporate-responsibility/
corporate-responsibility-policies
Responsible investment
www.3i.com/corporate-responsibility/
a-responsible-investor/responsible-investment
56
3i Group Annual report and accounts 2016
Strategic report
Corporate responsibility
External benchmarking
We believe that it is important to evidence our commitment to
operating responsibly and to show how we are performing.
Accordingly, we provide information to shareholders and other
interested stakeholders.
Sustainability indices
We have been a long-standing member of the Dow Jones
Sustainability Indices and of the FTSE4Good Index Series since
2001 and 2011 respectively.
The Dow Jones Sustainability Indices are the longest-running
global sustainability benchmarks and are used by asset
managers globally to assist them in their investment decisions.
The FTSE4Good Index Series is designed to measure the
performance of companies demonstrating strong corporate
responsibility practices.
Carbon Disclosure Project
The Carbon Disclosure Project is an international, not-for-profit
organisation providing a framework which enables businesses
to disclose their greenhouse emissions and other metrics
voluntarily. 3i has been making annual submissions to the
Carbon Disclosure Project since 2006.
By order of the Board
Simon Borrows
Chief Executive
18 May 2016
Corporate Governance
Chairman’s introduction
3i Group Annual report and accounts 2016
57
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
“ The governance and oversight of 3i’s
business model and strategic objectives
is key to the continuing value creation
for our shareholders.”
This section of the report describes how 3i is
governed and managed. It gives details on our
Board and Executive Committee members and
explains how the Board is organised and operates.
It also explains the roles and composition of Board
Committees and the division of responsibilities
between the Directors, including between the
Chairman and Chief Executive. This section
also includes the Directors’ remuneration report
and reports from the Audit and Compliance
Committee, the Valuations Committee and
the Nominations Committee.
Good corporate governance is fundamental to 3i and its activities.
Governance and oversight of the Group’s business model and
strategy are critical to the delivery of value to the Group’s
stakeholders. This is more important than ever given the volatile
and uncertain economic and political environment and the
changing regulatory landscape that our sector faces.
The Board is responsible to shareholders for the overall
management and oversight of the Group and for its long-term
success. In particular, the Board is responsible for agreeing the
Group’s strategy, monitoring financial performance, setting and
monitoring the Group’s risk appetite and maintaining an effective
system of internal controls.
It is the Board’s responsibility to ensure that the Group has a clear
strategy and that the necessary people, resources and structures
are in place to support the delivery of this strategy.
Simon Thompson
Chairman
Statement of Compliance
The Board has considered the Company’s compliance with the main principles and
provisions of the UK Corporate Governance Code (the “Code”) published by the
Financial Reporting Council in September 2014, publicly available at www.frc.org.uk.
The Board considers that the Company has complied with the relevant provisions of the
Code throughout the year under review.
58
3i Group Annual report and accounts 2016
Corporate Governance
Board of Directors and Executive Committee
Board of Directors
Simon Thompson
Chairman
Non-executive Director since April
2015 and appointed Chairman with
effect from close of 2015 AGM.
Chairman of Tullow Oil plc and non-
executive director of Rio Tinto plc.
Previous experience
Executive director of Anglo American
plc and chairman of the Tarmac
Group. Non-executive director of
AngloGold Ashanti Ltd, Newmont
Mining Corporation and Sandvik AB.
Senior Independent Director of Amec
Foster Wheeler plc. Previous career
in investment banking with N M
Rothschild and S.G. Warburg.
Julia Wilson
Group Finance Director
Group Finance Director and member
of the Executive Committee since
2008. A member of the Group’s
Investment Committee since 2012.
Joined 3i in 2006 as Deputy Finance
Director. Also a non-executive
director at Legal & General Group Plc.
Previous experience
Group Director of Corporate Finance
at Cable & Wireless plc.
Caroline Banszky
Non-executive Director
Non-executive Director since July
2014. The Managing Director of the
Law Debenture Corporation p.l.c.
since 2002.
Previous experience
Chief Operating Officer of SVB
Holdings PLC, now Novae Group PLC,
a Lloyd’s listed integrated vehicle from
1997 to 2002. Previously Finance
Director of N.M. Rothschild & Sons
Limited from 1995 to 1997, having
joined the bank in 1981. She originally
trained with what is now KPMG.
David Hutchison
Non-executive Director
Non-executive Director since
November 2013. Chief Executive
of Social Finance Limited and a
non-executive director of the Start-Up
Loans Company.
Previous experience
Until 2009 Head of UK Investment
Banking at Dresdner Kleinwort
Limited and a member of its Global
Banking Operating Committee.
Simon Borrows
Chief Executive
Chief Executive since 2012, and an
Executive Director since he joined 3i
in 2011. Chairman of the Group Risk
Committee, the Executive Committee
and the Group’s Investment Committee.
Member of the Supervisory Board of Peer
Holding B.V., the Dutch holding company
for the Group’s and 3i Eurofund V’s
investment in Action. Also a non-executive
director at The British Land Company PLC.
Previous experience
Formerly Chairman of Greenhill & Co
International LLP, having previously been
Co-Chief Executive Officer of Greenhill
& Co, Inc. Before founding the European
operations of Greenhill & Co in 1998 he
was the Managing Director of Baring
Brothers International Limited.
Jonathan Asquith
Deputy Chairman
Deputy Chairman since April 2015 and
Senior Independent Director since
July 2014. Non-executive Director since
2011. Chairman of Citigroup Global
Markets Limited.
Previous experience
Chairman of AXA Investment Managers
(to 2014). Non-executive director of
Ashmore Group plc and Dexion Capital
plc. Director of Schroders plc from
2002 to 2008, during which time he was
Chief Financial Officer and later Vice
Chairman. Previously spent 18 years
in investment banking with Morgan
Grenfell and Deutsche Bank.
Peter Grosch
Non-executive Director
Non-executive Director since
November 2015. Chairman of Kelvion
GmbH, deputy Chairman of SLM
Solutions AG and director of Faster
SPA as well as being chairman of
Euro-Diesel, a 3i investee company.
Previous experience
CEO and President of Diehl Aerospace
and Defence Systems, Executive Vice
President DaimlerChrysler Off highway
and Managing Director and Board
Member of MTU Friedrichhafen
(now Rolls Royce Power Systems AG).
Martine Verluyten
Non-executive Director
Non-executive Director since 2012.
A non-executive director of Thomas
Cook Group plc, STMicroelectronics NV
and Groupe Bruxelles Lambert.
Previous experience
Chief Financial Officer of Umicore,
a Brussels-based listed materials
technology group, from 2006 to
December 2011. Before joining Umicore
was Group Controller and then
Chief Financial Officer of Mobistar.
Executive Committee
Menno Antal
Managing Partner, Private Equity
A member of the Executive
Committee and the Group’s
Investment Committee since 2010.
Member of the Supervisory Board of
Peer Holding B.V., the Dutch holding
company for the Group’s and
3i Eurofund V’s investment in Action.
Previous experience
Joined 3i in 2000 and Managing
Director, Benelux, since 2003. Prior to
joining 3i, spent 10 years at Heineken
in a range of international managerial
positions. Holds an engineering
degree from Delft University and an
MBA from IMD.
Jeremy Ghose
Managing Partner and CEO
of 3i Debt Management
A member of the Executive Committee
and Chairman of the Debt Management
Investment Committee since joining
3i in 2011 on 3i’s acquisition of Mizuho
Investment Management (UK) Limited
from Mizuho Corporate Bank.
Previous experience
Prior to joining 3i, was with Mizuho
Corporate Bank (formerly The Fuji Bank)
since 1988 and on its executive board
since 2005. Founder of Mizuho’s
Leveraged Finance business in 1988
and of the third-party independent debt
fund management business in 2005.
Ben Loomes
Managing Partner, Infrastructure
and Group Strategy Director
A member of the Executive
Committee and the Group’s
Investment Committee since 2012.
Previous experience
Joined 3i in 2012. Prior to joining 3i,
experience included mergers and
acquisitions, financing advisory
and restructuring, including roles
at Goldman Sachs, Greenhill & Co
and Morgan Stanley.
3i Group Annual report and accounts 2016
59
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Kevin Dunn
General Counsel and
Company Secretary
Responsible for 3i’s legal, compliance,
internal audit, human resources
and company secretarial functions.
A member of the Executive
Committee since joining 3i in 2007.
Previous experience
Prior to joining 3i, was a Senior
Managing Director, running GE’s
European Leveraged Finance business
after serving as European General
Counsel for GE. Prior to GE, was a
partner at the law firms Travers Smith
and Latham & Watkins.
Alan Giddins
Managing Partner, Private Equity
A member of the Executive
Committee and the Group’s
Investment Committee since 2010.
Previous experience
Joined 3i in 2005. Prior to joining 3i,
spent 13 years in investment banking,
latterly as a Managing Director at
Société Générale. Qualified as a
chartered accountant with KPMG.
Phil White
Managing Partner, Infrastructure
A member of the Executive Committee
and the Group’s Investment
Committee since February 2014.
Previous experience
Joined 3i in 2007. Prior to joining 3i,
experience in infrastructure
investment, advisory and financing,
including roles at Macquarie,
WestLB and Barclays.
60
3i Group Annual report and accounts 2016
Corporate Governance
The role of the Board
Board and Committee structure
The Board is responsible for ensuring that there is an effective
organisational and reporting structure in place such that there are
clear reporting lines within the Group and well defined roles and
responsibilities. This is to ensure that the right decisions are being
made with involvement from the right people.
The Board is assisted by various Principal Committees of the
Board which report to it regularly. This committee structure
is outlined on page 61. The Board reviews membership of these
Committees regularly. The Board aims to ensure that undue
reliance is not placed on particular Directors. These Board
Committees have clearly defined terms of reference which are
available at www.3i.com
Day-to-day management of the Group is the responsibility of the
Chief Executive. To assist him in this role, the Chief Executive has
established a number of additional Committees which are also
outlined on page 61.
Division of responsibilities
Role of the Chairman
– Leads the Board in setting its agenda, agreeing strategy,
monitoring financial and operational performance, and
establishing the Group’s risk appetite.
– Organises the business of the Board, ensuring its effectiveness,
and maintaining an effective system of internal controls.
– Ensures that non-executive Directors receive relevant and accurate
information to facilitate an open and effective discussion. This
includes ensuring that the non-executive Directors receive regular
reports on shareholders’ views on the Group.
– Responsible for the composition of the Board and facilitates the
effective contribution of non-executive Directors and constructive
relationships between Executive and non-executive Directors.
Board composition
Composition
Executive
Non-Executive
25%
75%
Tenure
3–9 years
1–3 years
Under 1 year
50%
37.5%
12.5%
Gender diversity
Male
Female
62.5%
37.5%
Role of the Chief Executive
– Direct charge of the Group on a day-to-day basis and is
accountable to the Board for the financial and operational
performance of the Group.
– Leads the Executive Committee to develop and implement
the Group’s strategy and manage risk and the internal
control framework.
– Chairs the Investment Committee to review the acquisition,
management and disposal of investments.
– Reports to the Board on financial and operational performance, risk
management and progress in delivering the strategic objectives.
– Regularly engages with shareholders and other key stakeholders
on the Group’s activities and progress.
Role of non-executive Directors
– Scrutinise the performance of management in meeting agreed
objectives and monitor the reporting of performance.
– Seek assurance on the integrity of the financial information and
that financial controls and systems of risk management are robust
and defensible.
– Determine appropriate levels of remuneration for Executive
Directors and Executive Committee and have a prime role in
appointing Directors and in succession planning.
– Constructively challenge and help develop proposals on strategy;
this occurs at meetings of the Board, and in particular at the annual
review meeting to discuss ongoing strategy, the most recent of
which took place in December 2015.
3i Group Annual report and accounts 2016
61
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Governance framework
The Board
Chairman: Simon Thompson
Chief Executive: Simon Borrows
Comprises: Chairman, 2 Executive Directors
and 5 non-executive Directors
Role of the Board
p60
Biographies
p58
Principal Board Committees
Audit and Compliance
Committee
Financial reporting,
risk and internal controls
Caroline Banszky (Chairman)
Jonathan Asquith
Martine Verluyten
Remuneration
Committee
Director and senior
management remuneration
and Group remuneration
structure
Jonathan Asquith (Chairman)
Caroline Banszky
David Hutchison
Nominations
Committee
Board appointments,
and size, balance
and composition
of the Board
Simon Thompson (Chairman)
Jonathan Asquith
Caroline Banszky
Peter Grosch
David Hutchison
Martine Verluyten
Valuations
Committee
Valuation policy
and investment
valuations
David Hutchison (Chairman)
Simon Thompson
Simon Borrows
Peter Grosch
Martine Verluyten
Julia Wilson
Audit and Compliance
Committee report
p75
Remuneration
Committee report
p82
Nominations
Committee report
p74
Valuations
Committee report
p79
In addition to its Principal Committees, the Board also has a number of other standing Committees, including the Treasury
Transactions Committee, established to consider specific items of business on an ad hoc basis as required.
Chief Executive Committees
Executive Committee
Investment Committee
Group Risk Committee
Conflicts Committee
Principal oversight
body for management
of the business
Simon Borrows (Chairman)
Menno Antal
Kevin Dunn
Jeremy Ghose
Alan Giddins
Ben Loomes
Phil White
Julia Wilson
Acquisition, management
and disposal of
investments
Simon Borrows (Chairman)
Menno Antal
Alan Giddins
Ian Lobley
Ben Loomes
Phil White
Julia Wilson
Oversees the Group’s
risk management
framework
Simon Borrows (Chairman)
Menno Antal
Kevin Dunn
Jeremy Ghose
Alan Giddins
Ben Loomes
Phil White
Julia Wilson
Head of Group Compliance
Head of Internal Audit
Independent review
of conflict issues
Kevin Dunn (Chairman)
Ben Loomes
Julia Wilson
Executive Committee
Investment Committee
Group Risk Committee
Conflicts Committee
p59
p28
p28
p28
Effectiveness
During the year, the Board conducted its annual evaluation of
its own performance and that of its Committees and individual
Directors. On this occasion, the process was externally facilitated
by Lintstock Limited. Lintstock Limited has no other connections
with the Company. The evaluation consisted of a questionnaire,
completed by all Board members plus the other six members
of the Executive Committee, one-to-one interviews, and a
subsequent report and action plan that was discussed and
agreed at the Board. Overall, the evaluation concluded that
the Board is performing well, but some areas for further
improvement were identified and agreed.
The evaluation included the following topics: consideration of
Board composition, expertise and dynamics; time management
and Board support; the performance of the Board’s Committees;
the Board’s strategic and operational oversight; succession
planning and human resources management; and priorities for
change. During the review Directors identified areas for further
broadening of the Board’s experience and expertise through
recruitment as opportunities arise. Areas requiring increased
focus, debate and, in some cases, reporting were identified and
additional opportunities for Directors to interact with senior
personnel beyond the Executive Committee were agreed.
In his role as Senior Independent Director, Mr J P Asquith led a
review by the Directors of the performance of the Chairman and
subsequently reported back to the Board and provided feedback
to the Chairman.
62
3i Group Annual report and accounts 2016
Corporate Governance
The role of the Board
How the Board operates
The Chairman leads the Board and ensures its effectiveness.
He organises its business and sets its agenda. In addition to the
Chairman, there are currently five non-executive Directors with
a range of strong and complementary skills.
Attendance at Board and Committee meetings during the year is
shown on page 68. Before each Board and Committee meeting,
relevant reports and papers, including financial performance data
and detailed updates on the progress and implementation of
the strategic plan where appropriate, are circulated to Directors.
The Board is able to discuss these reports and updates and to
challenge directly the Executive Directors and other senior
management, who attend all or part of the Board meetings
where relevant.
The key responsibilities and areas of focus for the Board are:
– Strategy – contribute to the development of, and agree, the
Group’s strategy. This includes through review and discussion
of reports and updates at Board meetings as well as through
the annual strategy conference which is attended by the Board
and, where relevant, members of the Executive Committee.
– Group financial and operational performance – review and
monitor the performance of the Group, including through
regular reporting and discussions with the Executive
Committee and other senior management.
– Senior management – ensure that the Executive Committee
has the skills and resources to deliver the strategy and that
appropriate succession and contingency planning is in place.
– Evaluation and composition – review the performance of the
Board and its Committees to ensure that they are effective.
Ensure that the Board and its Committees comprise competent
and capable individuals with a range of skills and experience
who bring independent views to the decisions being made.
– Internal controls – maintain an appropriate internal control
framework.
– Risk – ensure that there are effective risk management
policies and processes in place and an appropriate
governance structure.
The Board has a formal schedule of matters reserved to it and its
duly authorised Committees for decision. This is described on
page 67. Matters delegated by the Board to management include
implementation of the Board approved strategy, day-to-day
management and operation of the business, the appointment
and remuneration of staff below the Executive Committee and
the formulation and implementation of risk management policies
and processes.
Statutory and corporate
governance information
3i Group Annual report and accounts 2016
63
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Investment policy
The current investment policy is set out below.
Investment policy
– 3i is an investment company which aims to provide its
shareholders with quoted access to private equity,
infrastructure and debt management investment returns.
Currently, its main focus is on making quoted and unquoted
equity and/or debt investments in businesses and funds
in Europe, Asia and the Americas. The geographies,
economic sectors, funds and asset classes in which 3i
invests continue to evolve as opportunities are identified.
Proposed investments are assessed individually and all
significant investments require approval from the Group’s
Investment Committee. Overall investment targets are
subject to periodic reviews and the investment portfolio is
also reviewed to monitor exposure to specific geographies,
economic sectors and asset classes.
– 3i seeks to diversify risk through significant dispersion of
investments by geography, economic sector, asset class
and size as well as through the maturity profile of its
investment portfolio.
– Although 3i does not set maximum exposure limits for asset
allocations, it does have a maximum exposure limit that, save
as mentioned below, no investment will be made unless its
cost does not exceed 15% of the investment portfolio value
as shown in the last published valuation. A further investment
may be made in an existing investee company provided the
aggregate cost of that investment and of all other
investments in that investee company does not exceed 15%
of the investment portfolio value as shown in the last
published valuation. A higher limit of 30% will apply to the
Company’s investment in 3i Infrastructure plc. For the
avoidance of doubt, 3i may retain an investment even if its
carrying value is greater than 15% or 30% (as the case may
be) of the portfolio value at the time of an updated valuation.
– Investments are generally funded with a mixture of debt and
shareholders’ funds with a view to maximising returns to
shareholders, whilst maintaining a strong capital base. 3i’s
gearing depends not only on its level of debt, but also on
the impact of market movements and other factors on the
value of its investments. The Board takes this into account
when, as required, it sets a precise maximum level of gearing.
The Board has therefore set the maximum level of gearing at
150% and has set no minimum level of gearing. If the gearing
ratio should exceed the 150% maximum limit, the Board will
take steps to reduce the gearing ratio to below that limit as
soon as practicable thereafter. 3i is committed to achieving
balance sheet efficiency.
The UK Listing Authority’s Listing Rules require 3i, as a
closed-ended investment fund, to publish an investment policy.
Shareholder approval is required for material changes to this
policy. Non-material changes can be made by the Board. Since
publication of the Annual report and accounts 2015 the Board
has made one non-material change to the first paragraph of the
investment policy by changing “across” to “in” in the phrase
“across Europe, Asia and the Americas”. This change was made so
as to better reflect the Group’s current areas of investment focus.
Tax and investment company status
The Company is an investment company under section 833 of
the Companies Act 2006. HM Revenue & Customs has approved
the Company as an investment trust under section 1158 of the
Corporation Tax Act 2010 and the Company directs its affairs
to enable it to continue to remain so approved.
Regulation and management arrangements
3i Investments plc, 3i Debt Management Investments Limited,
3i BIFM Investments Limited, 3i Europe plc and 3i Nordic plc
(all of which are subsidiaries of the Company) are authorised and
regulated by the Financial Conduct Authority (“FCA”) under the
Financial Services and Markets Act 2000. Where applicable,
certain Group subsidiaries’ businesses outside the United
Kingdom are regulated locally by relevant authorities, including
two subsidiaries registered as investment advisers with the US
Securities and Exchange Commission.
3i Investments plc acts as investment manager to the Company
and certain of its subsidiaries. Contracts for these investment
management and other services, for which regulatory
authorisation is required, provide for fees based on the work done
and costs incurred in providing such services. These contracts
may be terminated by either party on reasonable notice.
3i Investments plc also acts as investment adviser to 3i
Infrastructure plc. These services (and related fees) are set out
in contracts containing detailed provisions.
3i plc provides the Group with certain corporate and
administrative services, for which no regulatory authorisation is
required, under contracts which provide for fees based on the
work done and costs incurred in providing such services together
with a performance fee based on realised profits on the sale
of assets.
3i Investments plc is authorised by the FCA to, among other
things, manage Alternative Investment Funds (“AIFs”). It is
currently the Alternative Investment Fund Manager (“AIFM”)
of five AIFs, namely, 3i Group plc, 3i Growth Capital Fund, 3i
Eurofund V, the 3i European Middle Market Loan Fund and the
3i Global Income Fund. In compliance with regulatory requirements,
3i Investments plc has ensured that a depository has been
appointed for each AIF. This is Citibank Europe plc, UK Branch
for all AIFs with the exception of the 3i Global Income Fund
which has appointed Citi Depositary Services Ireland Limited.
64
3i Group Annual report and accounts 2016
Corporate Governance
Statutory and corporate governance information
The Annual report and accounts meet the investor disclosure
requirements as set out in FUND 3.2.2R, 3.2.3R, 3.2.5R and 3.2.6R
of the FCA’s Investment Funds sourcebook for 3i Group plc as a
standalone entity. The Company’s profit for the year is stated in
its Statement of changes in equity and its Financial position is
shown on page 97. The Company performs substantially all of
its investment related activities through its subsidiaries and
therefore the Group’s Consolidated statement of comprehensive
income is considered to be more useful to investors than a
Company statement.
Furthermore, in some instances the relevant FUND disclosures
have been made in relation to the Group on a consolidated basis
rather than in respect of 3i Group plc as a standalone entity. This
is because 3i Group plc, as a standalone entity, operates through
its group subsidiaries and therefore reporting on the Group’s
activities provides more relevant information on the Company
and its position. There have been no material changes to the
Company’s operations in the past year.
Although the disclosures required by FUND 3.2.2R, 3.2.3R, 3.2.5R
and 3.2.6R of the FCA’s Investment Funds sourcebook are covered
in this Annual report they are also, for convenience, summarised
on the 3i website at www.3i.com. This will be updated as required
and changes noted in future Annual reports.
The Alternative Investment Fund Managers Directive requires
3i to comply with certain reporting obligations. A summary of
the remuneration policy of 3i can be found on the
Company’s website.
The total amount of remuneration paid by 3i to its staff for the
year was £83 million, of which £41 million was fixed remuneration
and £42 million was variable remuneration. The aggregate total
remuneration paid to AIFM Identified Staff for the year was
£17 million, of which £14 million was paid to Senior Management
and £3 million was paid to other AIFM Identified Staff.
Results and dividends
Total comprehensive income for the year was £824 million
(2015: £659 million). An interim dividend of 6.0 pence (comprising
a base dividend of 2.7 pence and an additional dividend of 3.3
pence) per ordinary share in respect of the year to 31 March 2016
was paid on 7 January 2016. The Directors recommend a final
dividend of 16 pence (comprising a base dividend of 5.4 pence
and an additional dividend of 10.6 pence) per ordinary share be
paid in respect of the year to 31 March 2016 to shareholders on
the Register at the close of business on 17 June 2016.
The trustee of The 3i Group Employee Trust (“the Employee
Trust”) has waived (subject to certain minor exceptions) dividends
declared on shares in the Company held by the Employee Trust
and the Trustee of The 3i Group Share Incentive Plan has waived
dividends on unallocated shares in the Company held by it.
Share capital and debentures
The issued ordinary share capital of the Company as at 1 April
2015 was 972,453,819 ordinary shares and at 31 March 2016 was
972,661,444 ordinary shares of 7319/22 pence each. It increased over
the year by 207,625 ordinary shares on the issue of shares to the
trustee of The 3i Group Share Incentive Plan and on the issue
of shares under The 3i Group Discretionary Share Plan.
At the Annual General Meeting (“AGM”) on 25 June 2015, the
Directors were authorised to repurchase up to 97,000,000 ordinary
shares in the Company (representing approximately 10% of the
Company’s issued ordinary share capital as at 11 May 2015) until
the Company’s AGM in 2016 or 24 September 2016, if earlier.
This authority was not exercised in the year.
As detailed in Note 16 to the Accounts, as at 31 March 2016
the Company had in issue Notes issued under the 3i Group plc
£2,000 million Note Issuance Programme.
Directors’ conflicts of interests and Directors’
indemnities
Directors have a statutory duty to avoid conflicts of interest with
the Company. The Company’s Articles of Association enable
Directors to approve conflicts of interest and include other conflict
of interest provisions. The Company has implemented processes
to identify potential and actual conflicts of interest. Such conflicts
are then considered for approval by the Board, subject, if
necessary, to appropriate conditions.
As permitted by the Company’s Articles of Association during
the year and as at the date of this Directors’ report, there were
in place Qualifying Third-Party Indemnity Provisions
(as defined under relevant legislation) for the benefit of the
Company’s Directors and for the benefit of Directors
of one associated company.
Employment
The employment policy of the Group is one of equal opportunity
in the selection, training, career development and promotion of
employees, regardless of age, gender, sexual orientation, ethnic
origin, religion and whether disabled or otherwise.
3i treats applicants and employees with disabilities fairly and
provides facilities, equipment and training to assist disabled
employees to do their jobs. Arrangements are made as necessary
to ensure support to job applicants who happen to be disabled
and who respond to requests to inform the Company of any
requirements. Should an employee become disabled during their
employment, efforts would be made to retain them in their
current employment or to explore the opportunities for their
retraining or redeployment within 3i. Financial support is also
provided by 3i to support disabled employees who are unable
to work, as appropriate to local market conditions.
3i Group Annual report and accounts 2016
65
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
3i’s principal means of keeping in touch with the views of its
employees is through employee appraisals, informal
consultations, team briefings and staff conferences. Managers
throughout 3i have a continuing responsibility to keep their staff
informed of developments and to communicate financial results
and other matters of interest. This is achieved by structured
communication including regular meetings of employees.
3i is an equal opportunities employer and has clear grievance
and disciplinary procedures in place. 3i also has an employee
assistance programme which provides a confidential, free and
independent counselling service and is available to all UK staff
and their families in the UK.
3i’s employment policies are designed to provide a competitive
reward package which will attract and retain high quality staff,
whilst ensuring that the relevant costs remain at an
appropriate level.
3i’s remuneration policy is influenced by 3i’s financial and other
performance conditions and market practices in the countries
in which it operates. All employees receive a base salary and are
also eligible to be considered for a performance-related annual
variable incentive award. For those members of staff receiving
higher levels of annual variable incentive awards, a proportion
of such awards is delivered in 3i shares, vesting over a number
of years. Remuneration policy is reviewed by the 3i Group plc
Remuneration Committee, comprising 3i Group plc non-
executive Directors.
Where appropriate, employees are eligible to participate in 3i
share schemes to encourage employees’ involvement in 3i’s
performance. Investment executives in the Private Equity business
line may also participate in carried interest schemes, which allow
executives to share directly in future profits on investments.
Similarly, investment executives in the Infrastructure and Debt
Management business lines may participate in asset-linked and/
or fee-linked incentive arrangements. Employees participate
in local state or company pension schemes as appropriate to
local market conditions.
Political donations
In line with Group policy, during the year to 31 March 2016 no
donations were made to political parties or organisations, or
independent election candidates, and no political expenditure
was incurred.
Significant agreements
As at 31 March 2016, the Company was party to one agreement
subject to a renegotiation period on a change of control of
the Company following a takeover bid. This agreement is a
£350 million multi-currency Revolving Credit Facility Agreement
dated 5 September 2014, between the Company, Barclays Bank
PLC and 11 other banks. The Company is required to notify
Barclays Bank PLC, as agent bank, within five days, of a change
of control. This opens a 20-day negotiation period to determine
if the Majority Lenders (as defined in the agreement) are willing
to continue the facility. Failing agreement, amounts outstanding
would be repayable and the facility cancelled.
Statement of Directors’ responsibilities
The Directors are responsible for preparing the Annual report and
accounts in accordance with applicable United Kingdom law and
those International Financial Reporting Standards (“IFRSs”) which
have been adopted by the European Union.
Under Company Law the Directors must not approve the Group
financial statements unless they are satisfied that they present
fairly the financial position, financial performance and cash flows
of the Group for that period. The Directors consider that this
Annual report and accounts, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Company’s performance, business
model and strategy. In preparing the Group financial statements
the Directors:
(a) select suitable accounting policies in accordance with
International Accounting Standard 8: Accounting Policies,
Changes in Accounting Estimates and Errors and then apply
them consistently;
(b) present information, including accounting policies, in a manner
that provides relevant, reliable, comparable and understandable
information;
(c) provide additional disclosures when compliance with the
specific requirements in IFRSs as adopted by the EU is insufficient
to enable users to understand the impact of particular
transactions, other events and conditions on the Group’s financial
position and financial performance;
(d) state that the Group has complied with IFRSs as adopted by
the EU, subject to any material departures disclosed and
explained in the financial statements; and
(e) make judgements and estimates that are reasonable.
66
3i Group Annual report and accounts 2016
Corporate Governance
Statutory and corporate governance information
The Directors have a responsibility for ensuring that proper
accounting records are kept which are sufficient to show and
explain the Group’s transactions and disclose with reasonable
accuracy at any time the financial position of the Group and
enable them to ensure that the Group financial statements
comply with the Companies Act 2006.
Audit information
Pursuant to section 418(2) of the Companies Act 2006, each of the
Directors confirms that:
(a) so far as they are aware, there is no relevant audit information
of which the Company’s Auditor is unaware; and
They have a general responsibility for taking such steps as are
reasonably open to them to safeguard the assets of the Group
and to prevent and detect fraud and other irregularities.
(b) they have taken all steps they ought to have taken to make
themselves aware of any relevant audit information and to
establish that the Company’s Auditor is aware of such information.
Appointment of auditor
In accordance with section 489 of the Companies Act 2006,
a resolution proposing the reappointment of Ernst & Young LLP
as the Company’s Auditor will be put to members at the
forthcoming AGM.
Restatement
The Group carried out a review of the accounting for subsidiaries
in the parent company’s balance sheet which resulted in the
restatement shown in Note 31 of the financial statements.
Information required by listing rule 9.8.4
Information required by Listing Rule 9.8.4 may be found as set out
below:
Topic
Capitalised interest
Share allotments
Location
Portfolio income on page 41
Note 19
Information included in Strategic report
In accordance with section 414 C (11) of the Companies Act 2006
the following information otherwise required to be set out in the
Directors’ report has been included in the Strategic report: risk
management objectives and policies; post balance sheet events;
likely future developments in the business; and greenhouse
gas emissions.
The Directors’ viability statement is also shown in the
Strategic report.
In accordance with the FCA’s Disclosure and Transparency Rules,
the Directors confirm to the best of their knowledge that:
(a) the financial statements, prepared in accordance with
applicable accounting standards, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
taken as a whole; and
(b) the Strategic report includes a fair review of the development
and performance of the business and the position of the
Company and the undertakings included in the consolidation
taken as a whole together with a description of the principal risks
and uncertainties that they face.
The Directors of the Company and their functions are listed in the
Board of Directors and Executive Committee section.
Going concern
The Directors have acknowledged their responsibilities in relation
to the financial statements for the year to 31 March 2016.
The Group’s business activities, together with the factors likely to
affect its future development, performance and position are set
out in the Business review section. The financial position of the
Group, its capital structure, gearing and liquidity positions are
described in the Financial review section. The Group’s policies
on risk management and the Directors’ viability statement are
contained in the Risk management section. Further details are
contained in the Financial statements and Notes including, in
particular, details on financial risk management.
The Directors believe that the Group is well placed to manage
its business risks successfully. The Directors have considered the
uncertainties inherent in current and expected future market
conditions, their possible impact upon the financial performance
of the Group and a report from the Group Finance Director
on the outlook for liquidity. After consideration, the Directors
are satisfied that the Company has and will maintain sufficient
financial resources to enable it to continue operating in the
foreseeable future, which is at least 12 months from the date of
the accounts, and therefore continue to adopt the going concern
basis in preparing the Annual report and accounts.
Corporate governance statement
3i Group Annual report and accounts 2016
67
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
This section of the Directors’ report
contains the corporate governance
statement required by FCA Disclosure
and Transparency Rule 7.2.
Corporate governance
The Company seeks to comply with established best practice in
the field of corporate governance. The Board has adopted core
values and global policies which set out the behaviour expected
of staff in their dealings with shareholders, customers, colleagues,
suppliers and others who engage with the Company.
Throughout the year, the Company complied with the provisions
of the UK Corporate Governance Code (the “Code”) published
by the Financial Reporting Council in September 2014 which is
available on the FRC website.
The Board’s responsibilities and processes
The Board’s key responsibilities are described on page 60. It is
responsible for the overall management of the Group and may
exercise all the powers of the Company subject to the provisions
of relevant statutes, the Company’s Articles of Association and
any directions given by special resolution of the shareholders.
The Articles of Association empower the Board to offer, allot,
grant options over or otherwise deal with or dispose of the
Company’s shares as the Board may decide. The Companies Act
2006 authorises the Company to make market purchases of its
own shares if the purchase has first been authorised by a resolution
of the Company.
At the AGM in June 2015, shareholders renewed the Board’s
authority to allot ordinary shares and to repurchase ordinary
shares on behalf of the Company subject to certain limits. Details
of the authorities which the Board will be seeking at the 2016
AGM are set out in the 2016 Notice of AGM.
The Articles of Association also specifically empower the Board
to exercise the Company’s powers to borrow money and to
mortgage or charge the Company’s assets and any uncalled
capital and to issue debentures and other securities.
Matters reserved for the Board
The Board has approved a formal schedule of matters reserved to
it and its duly authorised Committees for decision. These include:
– Approval of the Group’s overall strategy, strategic plan and
annual operating budget;
– Approval of the Company’s half-yearly and annual financial
statements and changes in the Group’s accounting policies
or practices;
– Changes relating to the capital structure of the Company or
its regulated status;
– Major capital projects;
– Major changes in the nature of business operations;
– Investments and divestments in the ordinary course of business
above certain limits set by the Board from time to time;
– Policy on borrowing, gearing, hedging and treasury matters;
– Adequacy of risk management and internal control systems;
– Appointments to the Board and the Executive Committee;
– Principal terms and conditions of employment of members
of the Executive Committee; and
– Changes in employee share schemes and other long-term
incentive schemes.
Matters delegated by the Board to management include
implementation of the Board approved strategy, day-to-day
operation of the business, the appointment and remuneration of
executives below the Executive Committee and the formulation
and execution of risk management policies and procedures.
A succession and contingency plan for executive leadership is
prepared by management and reviewed periodically by the
Board. The purpose of this plan is to identify suitable candidates
for succession to key senior management positions, agree their
training and development needs, and ensure the necessary
human resources are in place for the Company to meet
its objectives.
Meetings of the Board
The principal matters considered by the Board during the year
(in addition to matters formally reserved to the Board) included:
– The Group’s strategic plan, related KPIs and annual budget;
– Regular reports from the Chief Executive;
– Reviews of and updates on the Group’s Private Equity,
Infrastructure and Debt Management businesses;
– Regular reports from the Board’s committees;
– Remuneration and pension matters including remuneration
philosophy and strategy;
– The recommendations of the Valuations Committee on
valuations of investments;
– The Annual report and accounts, half-yearly report and
quarterly trading updates;
– Dividend policy and dividends;
– Reports on regulatory matters including significant regulation
affecting the Group;
– Review of Balance Sheet Policy;
– Organisational capability and succession plans; and
– The new requirement for a viability statement in the Report
and accounts.
Reports and papers are circulated to the Directors in a timely
manner in preparation for Board and Committee meetings. These
papers are supplemented by information specifically requested
by the Directors from time to time.
68
3i Group Annual report and accounts 2016
Corporate Governance
Corporate governance statement
Performance evaluation
During the year, the Board conducted its annual evaluation of its own performance and that of its committees and individual Directors.
Further details are given on page 62.
Attendance at Board and committee meetings
The table below shows the number of full meetings of the Board and its committees attended by Directors during the year to 31 March
2016 and, in brackets, the number of such meetings they were eligible to attend. In addition to these meetings a number of additional
ad hoc meetings were held to deal with specific items as they arose.
Total meetings held
Number attended:
S R Thompson1
Sir Adrian Montague2
S A Borrows
J S Wilson
J P Asquith
C J Banszky
A R Cox3
P Grosch4
D A M Hutchison
M G Verluyten
1 Appointed 13 April 2015.
2 Retired 25 June 2015.
3 Retired 10 November 2015.
4 Appointed 1 November 2015.
Audit and
Compliance
Committee
6
Board
7
7(7)
2(2)
7(7)
7(7)
7(7)
7(7)
5(5)
3(3)
7(7)
6(7)
6(6)
6(6)
4(4)
2(2)
Nominations
Committee
Remuneration
Committee
Valuations
Committee
3
2(2)
3(3)
3(3)
2(3)
1(1)
3(3)
1(3)
6
6(6)
1(1)
5(5)
6(6)
4
3(3)
1(1)
4(4)
4(4)
1(1)
4(4)
4(4)
Appointment and re-election of Directors
Subject to the Company’s Articles of Association, the Companies
Acts and satisfactory performance evaluation, non-executive
Directors are appointed for an initial three-year term. Before the
third and sixth anniversaries of first appointment, the Director
discusses with the Board whether it is appropriate for a further
three-year term to be served.
Under the Company’s Articles of Association, the minimum
number of Directors is two and the maximum is 20, unless
otherwise determined by the Company by ordinary resolution.
Directors are appointed by ordinary resolution of shareholders or
by the Board. The Company’s Articles of Association provide for
Directors to retire by rotation at an AGM if they were appointed
by the Board since the preceding AGM, they held office during
the two preceding AGMs but did not retire at either of them, they
held non-executive office for a continuous period of nine years or
more at the date of that AGM, or they choose to retire from office.
Shareholders can remove any Director by special resolution
and appoint another person to be a director in their place by
ordinary resolution.
Subject to the Company’s Articles of Association, retiring
Directors are eligible for reappointment. The office of Director is
vacated if the Director resigns, becomes bankrupt or is prohibited
by law from being a Director or where the Board so resolves
following the Director suffering from ill-health or being absent
from Board meetings for 12 months without the Board’s
permission.
In accordance with the Code, all Directors are subject to
reappointment every year. Accordingly, at the AGM to be held
on 30 June 2016, all the Directors will retire from office. All the
Directors are eligible for and seek reappointment. The Board’s
recommendation for the reappointment of Directors is set out
in the 2016 Notice of AGM.
The roles of the Chairman, Chief Executive
and Senior Independent Director
The Board approved division of responsibilities between the
Chairman of the Board and the Chief Executive is described on
page 60. Mr J P Asquith served as Senior Independent Director
throughout the year.
3i Group Annual report and accounts 2016
69
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Directors
Directors’ biographical details are set out on page 58. The Board
currently comprises the Chairman, five non-executive Directors
and two Executive Directors. Mr J P Asquith, Ms C J Banszky,
Mr S A Borrows, Mr D A M Hutchison, Ms M G Verluyten and
Mrs J S Wilson served as Directors throughout the year under
review. Sir Adrian Montague served as a Director until 25 June
2015 and Mr A R Cox served as a Director until 10 November 2015.
Mr S R Thompson was appointed as a non-executive Director
on 13 April 2015 (and became Chairman on 25 June 2015) and
Mr P Grosch was appointed as a non-executive Director on
1 November 2015.
In addition to fulfilling their legal responsibilities as Directors,
non-executive Directors are expected to bring an independent
judgement to bear on issues of strategy, performance, resources
and standards of conduct, and to help the Board provide the
Company with effective leadership. Further details of their role
are set out on page 60. Non-executive Directors are expected to
make available sufficient time to meet the requirements of the
appointment. The average time commitment is expected to be
around 15 days a year together with additional time for serving
on the Board’s committees.
The Board’s discussions, and its approval of the Group’s strategic
plan and annual budget, provide the non-executive Directors with
the opportunity to contribute to and validate management’s plans
and assist in the development of strategy. The non-executive
Directors receive regular management accounts, reports and
information which enable them to scrutinise the Company’s
and management’s performance against agreed objectives.
Directors’ independence
All the non-executive Directors (other than the Chairman (who was
independent on appointment) and Mr P Grosch) were considered
by the Board to be independent for the purposes of the Code in
the year to 31 March 2016. Mr P Grosch is not considered
independent because of his links with the Group’s Private Equity
business including his position as chairman of Euro-Diesel, a 3i
investee company.
The Board reviews non-executive Director independence at
least annually, having regard to the potential relevance and
materiality of a Director’s interests and relationships. Other than
for Mr P Grosch, no Director was materially interested in any
contract or arrangement subsisting during or at the end of the
financial period that was significant in relation to the business of
the Company. Mr Grosch receives director’s fees from and is a
shareholder in Euro-Diesel, a company in which the Group
is invested.
Directors’ employment contracts
Mr S A Borrows and Mrs J S Wilson each have employment
contracts with the Group with notice periods of 12 months where
notice is given by the Group and six months where notice is given
by the Director. Save for these notice periods their employment
contracts have no unexpired terms. None of the other Directors
has a service contract with the Company.
Training and development
The Company has a training policy which provides a framework
within which training for Directors is planned with the objective of
ensuring Directors understand the duties and responsibilities of
being a director of a listed company. All Directors are required to
keep their skills up to date and maintain their familiarity with the
Company and its business continually. Presentations on different
aspects of the Company’s business are made regularly to the
Board. On appointment, all non-executive Directors have
discussions with the Chairman and the Chief Executive following
which appropriate briefings on the responsibilities of Directors,
the Company’s business and the Company’s procedures are
arranged. The Company provides opportunities for non-executive
Directors to obtain a thorough understanding of the Company’s
business by meeting members of the senior management
team who in turn arrange, as required, visits to investment
or support teams.
The Company has procedures for Directors to take independent
legal or other professional advice in relation to the performance
of their duties.
The Board’s committees
As described on page 60, the Board is assisted by various
principal committees of the Board which report regularly to it.
The membership and activities of the Audit and Compliance
Committee, the Remuneration Committee, the Valuations
Committee and the Nominations Committee are described
in their separate reports on pages 74 to 92.
The Board discontinued its Brand and Values Committee. The
work previously done by that Committee (including review of
3i’s values, responsible investing policy and other reputational
matters) was considered sufficiently core to the Group that it
was more appropriate for it to be dealt with by the full Board.
The Company Secretary
Directors have access to the advice and services of the General
Counsel and Company Secretary, who advises the Board, through
the Chairman, on governance matters. The Company’s Articles of
Association and the schedule of matters reserved to the Board or
its duly authorised committees for decision provide that the
appointment and removal of the Company Secretary is a matter
for the full Board.
70
3i Group Annual report and accounts 2016
Corporate Governance
Corporate governance statement
Major interests in ordinary shares
Notifications of the following major voting interests in the Company’s ordinary share capital (notifiable in accordance with Chapter 5 of
the FCA’s Disclosure and Transparency Rules or section 793 Companies Act 2006) had been received by the Company as at 31 March
2016 and 1 May 2016.
BlackRock, Inc
Artemis Investment Management LLP
UBS Global Asset Management
Threadneedle Asset Management Limited
Legal & General Investment Management Limited
Relations with shareholders and potential investors
Approach to Investor Relations
The Board recognises the importance of maintaining a purposeful
relationship with shareholders. The Group has a comprehensive
Investor Relations programme to help existing and potential
investors to understand its activities, strategy and financial
performance. The Chief Executive and the Group Finance
Director meet with the Company’s principal shareholders to
discuss relevant issues as they arise. The Chairman maintains a
dialogue with shareholders on strategy, corporate governance
and Directors’ remuneration as required. The Board receives
reports from the Company’s brokers on shareholder issues and
non-executive Directors are invited to attend the Company’s
presentations to analysts and are offered the opportunity to
meet shareholders.
Board oversight
The Executive Directors brief the Board on a regular basis on the
implementation of the Investor Relations programme and on
feedback received from analysts and investors. Any significant
concern raised by shareholders in relation to the Group is also
communicated to the Board. In addition, research reports
published by investment banks on 3i are circulated to the Board
on a regular basis.
The Board also receives periodic feedback from existing
shareholders and potential investors through 3i’s corporate
brokers, Bank of America Merrill Lynch and Barclays.
Institutional investor programme
Meetings with principal shareholders
The Executive Directors meet with the Group’s principal
shareholders on a twice yearly basis, following the publication of
annual and half-yearly results and as required during the year. The
Chairman and Senior Independent Director are also available to
meet with shareholders as required. The Investor Relations team
also manages a programme of engagement with smaller
shareholders, implemented through regular presentations
and meetings.
As at
31 March 2016
% of issued
share capital
As at
1 May 2016
% of issued
share capital
89,752,894
66,131,467
37,240,978
40,818,505
30,558,207
9.23
6.80
3.83
4.20
3.14
90,028,400
65,244,247
37,134,475
40,601,830
30,658,737
9.26
6.71
3.82
4.17
3.15
Meetings with potential investors
During the year, the Executive Directors and the Investor Relations
team held regular meetings with potential investors internationally
to communicate the strategy and performance of 3i.
Annual and half-yearly results presentations
The Executive Directors present the annual and half-yearly results
to a broad group of institutional investors and analysts. These
presentations are webcast live on 3i’s website, and the on-demand
webcast remains available on the website for a period of
12 months.
Capital markets day
The 2015 capital markets day, held in June, consisted of a
presentation to significant shareholders and analysts by senior
3i executives and the management teams of Scandlines and
Basic-Fit, two of the investments in our Private Equity portfolio.
This event was held in London. The presentations were focused
on the Scandlines and Basic-Fit business model and strategy and
on their recent financial performance. The presentation materials
used on the day were made available on 3i’s website to enable
those investors and analysts that could not attend to access the
information provided at the meeting.
Industry conferences
Throughout the year, the Executive Directors also participated in
a number of industry conferences organised by investment banks
for their institutional investor base. These included conferences
organised by Morgan Stanley, Société Générale, KBW, Bank of
America Merrill Lynch, JPMorgan Cazenove and Citi.
Individual investors
Individual investors are encouraged to engage with the Group
and provide feedback through the Investor Relations team and
the Company Secretary, whose contact details are available on
the website.
3i Group Annual report and accounts 2016
71
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Website
3i’s website provides a brief description of 3i’s history, current
operations and strategy, as well as an archive of over 10 years of
news and historical financial information on the Group and details
of forthcoming events for shareholders and analysts. Annual and
half-year results presentations are also webcast live and on-
demand on 3i’s website.
Annual General Meeting
The Company also uses its AGM as an opportunity to
communicate with its shareholders. At the Meeting, business
presentations are generally made by the Chairman and the Chief
Executive. The Chairmen of the Remuneration, Audit and
Compliance, and Nominations Committees are generally
available to answer shareholders’ questions. Business to be
discussed at the meeting is notified to shareholders in advance
through the Notice of Meeting and covers matters such as the
annual election of Directors, the appointment of the Auditors and
the dividend declaration. During the meeting, shareholders are
also asked to approve the financial statement and report of the
Directors and Auditors. In addition, shareholders are asked to
approve the Directors’ remuneration report.
The 2015 Notice of AGM was dispatched to shareholders not less
than 20 working days before the Meeting. At that Meeting, voting
on each resolution was taken on a poll and the poll results were
made available on the Company’s website.
Rights and restrictions attaching to shares
A summary of the rights and restrictions attaching to shares as at
31 March 2016 is set out below.
The Company’s Articles of Association may be amended by
special resolution of the shareholders in a general meeting.
Holders of ordinary shares enjoy the rights set out in the Articles
of Association of the Company and under the laws of England and
Wales. Any share may be issued with or have attached to it such
rights and restrictions as the Company by ordinary resolution or,
failing such resolution, the Board may decide.
Holders of ordinary shares are entitled to attend, speak and vote
at general meetings and to appoint proxies and, in the case of
corporations, corporate representatives to attend, speak and vote
at such meetings on their behalf. To attend and vote at a general
meeting a shareholder must be entered on the register of
members at such time (not being earlier than 48 hours before the
meeting) as stated in the Notice of general meeting. On a poll,
holders of ordinary shares are entitled to one vote for each
share held.
Holders of ordinary shares are entitled to receive the Company’s
Annual report and accounts, to receive such dividends and other
distributions as may lawfully be paid or declared on such shares
and, on any liquidation of the Company, to share in the surplus
assets of the Company after satisfaction of the entitlements of the
holders of any shares with preferred rights as may then be in issue.
There are no restrictions on the transfer of fully paid shares in the
Company, save as follows. The Board may decline to register: a
transfer of uncertificated shares in the circumstances set out in the
Uncertificated Securities Regulations 2001; a transfer to more than
four joint holders; a transfer of certificated shares which is not
in respect of only one class of share; a transfer which is not
accompanied by the certificate for the shares to which it relates;
a transfer which is not duly stamped in circumstances where a duly
stamped instrument is required; or a transfer where in accordance
with section 794 of the Companies Act 2006 a notice (under
section 793 of that Act) has been served by the Company on a
shareholder who has then failed to give the information required
within the specified time. In the latter circumstances the Company
may make the relevant shares subject to certain restrictions
(including in respect of the ability to exercise voting rights, to
transfer the shares validly and, except in the case of a liquidation,
to receive the payment of sums due from the Company).
There are no shares carrying special rights with regard to control
of the Company. There are no restrictions placed on voting rights
of fully paid shares, save where in accordance with Article 12 of the
Company’s Articles of Association a restriction notice has been
served by the Company in respect of shares for failure to comply
with statutory notices or where a transfer notice (as described
below) has been served in respect of shares and has not yet been
complied with. Where shares are held on behalf of former or
current employees under employee share schemes, those
participants can give instructions to the holder of such shares
as to how votes attached to such shares should be exercised.
In the circumstances specified in Article 38 of the Company’s
Articles of Association the Company may serve a transfer notice
on holders of shares. The relevant circumstances relate to: (a)
potential tax disadvantage to the Company, (b) the number of
“United States Residents” who own or hold shares becoming 75
or more, or (c) the Company being required to be registered as an
investment company under relevant US legislation. The notice
would require the transfer of relevant shares and pending such
transfer the rights and privileges attaching to those shares would
be suspended.
The Company is not aware of any agreements between holders
of its securities that may restrict the transfer of shares or exercise
of voting rights.
Portfolio management and voting policy
In relation to unquoted investments, the Group’s approach is to
seek to add value to the businesses in which the Group invests
through the Group’s extensive experience, resources and
contacts and through active engagement with the Boards of
those companies. In relation to quoted investments, the Group’s
policy is to exercise voting rights on all matters affecting
its interests.
72
3i Group Annual report and accounts 2016
Corporate Governance
Corporate governance statement
Processes and procedures
– Appointment of experienced and professional staff, both by
recruitment and promotion, of the necessary calibre to fulfil
their allotted responsibilities;
– A planning framework which incorporates a Board approved
strategic plan, with objectives for each business unit;
– Formal business risk reviews performed by management which
evaluate the potential financial impact and likelihood of
identified risks and possible new risk areas;
– The setting of control, mitigation and monitoring procedures
and the review of actual occurrences, identifying lessons to
be learnt;
– A comprehensive system of financial reporting to the Board,
based on an annual budget with monthly reporting of actual
results, analysis of variances, scrutiny of key performance
indicators and regular re-forecasting;
– Regular reports to the Board, which analyse funding
requirements, track the generation and use of capital and the
volume of liquidity, measure the Group’s exposure to exchange
rate movements and record the level of compliance with the
Group’s funding objectives;
– A reward process designed to align behaviours with the Group’s
risk appetite;
– A Group Compliance function whose role is to integrate
regulatory compliance procedures and best practices into
the Group’s systems;
– Well defined procedures governing the appraisal and approval
of investments, including detailed investment and divestment
approval procedures, incorporating appropriate levels of
authority and regular post-investment reviews; and
– Regular risk reviews, including an assessment of risks to reliable
financial reporting covering people, processes and systems,
and updates on the management of identified risks or actual
incidents.
Risk management and internal control
The Board has ultimate responsibility for risk management and
internal control, including for the determination of the nature
and extent of the principal risks it is willing to take to achieve its
strategic objectives and for ensuring that an appropriate
culture has been embedded throughout the organisation. Risk
management and internal control systems cannot eliminate all
risks but it is the role of the Board to ensure such systems are
robust and effective and take account of such risks. In addition
such systems are designed to manage rather than eliminate
the risk of failure to achieve business objectives and can provide
only reasonable and not absolute assurance against material
misstatement or loss.
Through the regular meetings of the Board and the schedule of
matters reserved to the Board or its duly authorised committees
for decision, the Board aims to maintain full and effective control
over appropriate strategic, financial, operational and
compliance issues.
The Board has put in place an organisational structure with clearly
defined lines of responsibility and delegation of authority. The
Board considers and approves a strategic plan and budget on
an annual basis and receives regular updates. In addition, there
are established procedures and processes for planning and
controlling expenditure and the making of investments. There
are also information and reporting systems for monitoring the
Group’s businesses and their performance.
The Group Risk Committee is a management committee formed
by the Chief Executive and its purpose is to identify and assess
the principal risks faced by the business, in the context of the
Group’s risk appetite, and oversee the mitigation or management
of those risks. This process was in place for the year to 31 March
2016 and up to the date of this report. Details of the risk
management framework can be found in the Risk section.
The overall risk management and internal control process is
regularly reviewed by the Board and the Audit and Compliance
Committee and complies with the Guidance on Risk
Management, Internal Control and Related Financial and Business
Reporting issued by the Financial Reporting Council. The Audit
and Compliance Committee performed its annual review of the
system’s effectiveness and reported its conclusions to the Board.
The process has been in place for the year under review and up to
the date of approval of this Annual report and accounts 2016.
The internal control process established for the Group includes:
Policies
– Core values and global policies together comprising the
Group’s high-level principles and controls, with which all staff
are expected to comply;
– Detailed policies and procedures, with processes for reporting
weaknesses and for monitoring corrective action; and
– A Compliance manual, with procedures for reporting
compliance therewith.
3i Group Annual report and accounts 2016
73
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Directors’ report
For the purposes of the UK Companies Act 2006, the Directors’
report of 3i Group plc comprises the Corporate Governance
section on pages 57 to 81 other than the Directors’ remuneration
report on pages 82 to 92.
The Strategic report, Directors’ report and Directors’
remuneration report have been drawn up and presented in
accordance with and in reliance upon English company law and
the liabilities of the Directors in connection with those reports
shall be subject to the limitations and restrictions provided by
that law.
By order of the Board
K J Dunn
Company Secretary
18 May 2016
Registered Office:
16 Palace Street
London SW1E 5JD
Verification
– An Internal Audit function which undertakes periodic
examination of business units and processes and recommends
improvements in controls to management;
– The external Auditors who are engaged to express an opinion
on the annual financial statements;
– An Audit and Compliance Committee which considers
significant control matters and receives reports from Internal
Audit, the external Auditor and Group Compliance on
a regular basis;
– The risk management and internal control systems are
monitored and supported by Internal Audit and Group
Compliance, which operate on an international basis and report
to management and the Audit and Compliance Committee on
the Group’s operations. The work of Internal Audit is focused
on the areas of greatest risk to the Group determined with
reference to the Group’s risk management process; and
– The external Auditors review and test the system of internal
financial control and the information contained in the annual
financial statements to the extent necessary for expressing
their opinion.
Financial reporting
In the context of the above framework, there are specific
processes in place in relation to financial reporting, including:
– Comprehensive system of key control and oversight processes,
including regular reconciliations, line manager reviews and
systems’ access controls;
– Updates for consideration by the Audit and Compliance
Committee of accounting developments, including draft and
new accounting standards and legislation;
– A separate Valuations Committee which considers the Group’s
investment valuation policies, application and outcome;
– Approval of the Group’s budget by the Board and regular
updates on actual and forecast financial performance against
budget;
– Reports from Internal Audit on matters relevant to the financial
reporting process, including periodic assessments of internal
controls, processes and fraud risk;
– Independent updates and reports from the external Auditors
on accounting developments, application of accounting
standards, key accounting judgements and observations on
systems and controls; and
– Appropriate Board oversight of external reporting.
3i Group Annual report and accounts 2016
74
Corporate Governance
Nominations
Committee report
“ The Nominations Committee has a vital
role to play in ensuring the Board has
the right balance of skills and experience
to lead the Company.”
Simon Thompson
Chairman, Nominations Committee
In its work the Committee keeps in mind the balance and
composition of the Board, including succession planning, and the
needs of the Company in terms of the desirable experience and
qualifications of future appointees as non-executive Directors.
The Company has a formal, rigorous and transparent process for
the appointment of Directors with the objective of identifying the
skills and experience profile required of new Directors and
identifying suitable candidates. The procedure includes the
appraisal and selection of potential candidates by the Committee,
including (in the case of non-executive Directors) whether they
have sufficient time to fulfil their roles. Specialist recruitment
consultants assist the Committee to identify suitable candidates
for appointment. The Committee’s recommendations for
appointment are put to the full Board for approval.
Further to the publication of the Davies Report on Women on
Boards, and Code Provision B.2.4, the Board strongly supports
the principle of boardroom diversity, of which gender is one
important aspect. The Board’s aim is to have a diverse Board
in terms of gender, industry experience, skills and educational
background, and nationality. The Board makes appointments on
merit and against objective criteria. External search consultancies
engaged by the Company are instructed to put forward for all
Board positions a diversity of candidates including women
candidates. External search consultancies engaged by the
Committee during the year were Egon Zehnder and The Zygos
Partnership. Egon Zehnder also provided other recruitment
services to the Group during the year. The Zygos Partnership
had no other connections with the Company during the year.
Membership during the year
Name
Membership status
Simon Thompson
Sir Adrian Montague
Jonathan Asquith
Caroline Banszky
Alistair Cox
Peter Grosch
David Hutchison
Martine Verluyten
Member since 13 April 2015 and
Chairman since 25 June 2015
Retired as Chairman and a member
on 25 June 2015
Member since March 2011
Member since July 2014
Member until 10 November 2015
Member since 1 November 2015
Member since November 2013
Member since January 2012
During the year, the Nominations Committee held three
meetings. Attendance of members at those meetings is shown
on the table on page 68.
The Committee completed the process commenced in the previous
year of identifying and recommending to the Board a candidate
to succeed Sir Adrian Montague as chairman of the Board. This
process was led by Mr Asquith as Senior Independent Director.
The Committee also considered a number of candidates for
appointment as non-executive Director and recommended to
the Board the appointment of Mr Grosch who was subsequently
appointed as a Director on 1 November 2015.
Audit and Compliance
Committee report
3i Group Annual report and accounts 2016
75
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
“ The Audit and Compliance Committee’s
priorities in FY2016 were to maintain
the strength of 3i’s internal control
environment as well as the integrity
of its financial reporting.”
Caroline Banszky
Chairman, Audit and Compliance Committee
The Chairman of the Committee also met a number of these
individuals separately in advance of the Committee meetings
providing an additional forum to discuss relevant issues. During
the year, the Committee held private discussions with the Group
Finance Director, the Head of Internal Audit, and the Head of
Group Compliance, and with the external Auditor in the absence
of management.
Membership during the year
Name
Membership status
Caroline Banszky (Chairman)
Jonathan Asquith
Alastair Cox
Martine Verluyten
Member since 17 July 2014
Chairman since 1 January 2015
Member since March 2011
Member until
10 November 2015
Member since 11 November 2015
The Board is satisfied that Ms Banszky and Mr Asquith have recent
and relevant financial experience as outlined in the UK Corporate
Governance Code. Further detail on each non-executive
Director’s experience can be found in the Directors’ biographies
on page 58.
Throughout the year, the Committee received regular reports on
a number of matters including the valuation of the investment
portfolio, internal audit findings and follow-up work, accounting
issues and judgements, and legal and regulatory matters. In
particular, the Committee focused on the developments with
regard to regulation for audit tendering and the definition of
non-audit services, cyber security and the requirement for a
viability statement. The Committee received presentations from
a number of members of senior management including the Group
Finance Director, Group General Counsel and Company
Secretary, Group Financial Controller, the Head of Internal Audit,
the Head of Compliance and the external Auditor Ernst & Young
LLP. Other attendees were invited from time to time depending
on the nature of agenda items.
76
3i Group Annual report and accounts 2016
Corporate Governance
Audit and Compliance Committee report
What the Committee reviewed in 2016
The Committee met six times during the year and the members’ attendance at meetings is shown in the table on page 68.
During the year the Committee’s activities included considering the following:
– Annual and half-yearly reports
– Quarterly performance updates
– Key accounting judgements and estimates
– Developments in financial reporting
– Fair, balanced and understandable
– Valuation reports and recommending the investment asset
valuations to the Board
– Confirmation of the external Auditor’s independence
– Policy and approval of non-audit fees
– The FY2016 Audit plan, including the Auditor’s significant audit
risks, (being the valuation of the unquoted investment portfolio and
the calculation of carried interest) as well as the area of audit focus
(revenue recognition)
– Auditor performance and effectiveness
– Regulatory position with regard to audit tender
Financial reporting
External audit
Internal control and risk management
Risk reviews
– Review of 3i’s system of internal control and risk management
– External and Internal audit reports
– Review of Corporate Governance changes including the risk
appetite statement and viability statement
– Internal audit effectiveness review
– Cyber security
– Regular reviews of compliance with regulatory rules
– Annual report on taxation
– Litigation
– Liquidity and going concern
In addition to areas of significant accounting judgement and
monitoring the effectiveness of 3i’s risk management, the
Committee particularly focused on the matters described below.
As one of the changes to the UK Corporate Governance Code
for the 2016 reporting year onwards, the Directors are required
to make a statement in the Annual Report as to the longer-term
viability of 3i as well as enhanced risk disclosures. The Committee
received regular updates throughout the year on the work being
undertaken to support the viability statement and risk disclosures,
including forecasts for capital and liquidity, the stress tests of
3i’s five-year strategic plan and an assessment of the key risks for
3i’s viability. A report was prepared for the Board in January 2016
which detailed the process undertaken across the business to
develop suitable scenarios against which to test 3i’s financial
performance as well as the results of these stress tests. This report
was then updated and presented to the Committee in May 2016.
The Committee agreed to recommend the viability statement and
risk disclosures to the Board for approval.
The Committee received two presentations in the year from the
IT Director on cyber security risk management. Management
engaged external advisers in late 2015 to assess the threat to
cyber security, including the potential impact of cyber attacks,
on both 3i’s information and infrastructure and its portfolio
companies. The Committee assessed the results of this review,
including the proposed actions to strengthen risk management
further, and were satisfied that 3i’s capability was proportionate
to its size and business activity. The Committee will receive an
update on cyber security and the implementation of
recommended actions in FY2017.
Given the significant changes to the taxation environment
announced as part of the OECD’s Base Erosion Profit Shifting
(“BEPS”) project in October 2015, the Committee received an
update on the impact of BEPS on the Group in addition to the
annual update it receives from the Tax Director on the Group’s
taxation status more generally. As an authorised Investment
Trust the Company does not pay tax on capital profits in the
United Kingdom. However the changes coming into force
over the next few years are expected to increase the resources
needed to comply with the various reporting requirements.
The Committee also considered the appropriateness of the
Group’s tax disclosures in the Annual Report and on its website.
The improved investment performance and good flow of
realisations led the Committee to review both carried interest
receivable and payable balances. Internal Audit also carried
out a review of carry payable and receivable in the year.
Following discussions with management and the external
Auditor, the Committee was satisfied that carried interest
was being appropriately accounted for.
In the year, management performed a detailed review of the
IFRS 10 accounting for subsidiaries in the parent company’s
balance sheet. The Committee considered and reviewed the
accounting adjustments as well as the external Auditor’s findings
and reporting in this area. These adjustments had no impact on
the Group’s reported result.
3i Group Annual report and accounts 2016
77
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Areas of accounting judgement and control focus
The Committee pays particular attention to matters it considers to be important by virtue of their size, complexity, level of judgement
or potential impact on the financial statements and wider business model.
Significant areas of accounting and control focus considered by the Committee are detailed in the table below, alongside the actions taken
by the Committee (with appropriate input, guidance and challenge from the external Auditor) to address these issues/judgements.
Areas of significant accounting judgement
What the Committee reviewed and concluded
Valuation of the Proprietary Capital portfolio
The most material area of judgement in the financial statements, and
noted as a key risk by the external Auditor, relates to the valuation of the
unquoted Proprietary Capital portfolio, which at 31 March 2016 was
£3,839 million, or 86% of net assets, under the Investment basis.
In recognition of the importance of this area the Board has a separate
Valuations Committee to review the valuations policy, process and
application to individual investments. This Valuations Committee
provides quarterly reports to the Committee and the Board.
The valuation of the Proprietary Capital portfolio is a primary input into
the carried interest accrual, which is determined by reference to the
valuation at 31 March 2016.
Fair, balanced and understandable and the presentation
of 3i’s results
Under the UK Corporate Governance Code the Board should establish
arrangements to ensure the Annual report presents a fair, balanced and
understandable assessment of the Group’s position and prospects and
make a statement that they considered the Annual report to be fair,
balanced and understandable.
On behalf of the Board, the Audit Committee considered what, if any,
enhancements were necessary to current procedures to ensure that this
statement could be made.
The Group prepares a non-GAAP Investment basis financial statements
following its adoption of IFRS 10 to ensure that its results remain
understandable.
Risk and internal control reviews
The Committee holds responsibility on behalf of the Board for
overseeing the effectiveness of the Group’s risk management and
internal control systems. It monitors the activities of the Group
Risk Committee (“GRC”), the risk management processes in place,
the Group’s whistleblowing arrangements and the activities of the
Internal Audit function, including its reporting on the
effectiveness of internal controls.
A report summarising each quarterly GRC meeting, along with the
risk report considered, is provided to the Committee for review
and discussion. The risk report details the principal risks, which
are derived from the Group Risk process, along with commentary
on how the exposure to these risks has moved in the quarter. The
Committee also monitors Internal Audit activity quarterly, covering
change management and other areas of identified higher risk.
The Head of Internal Audit provided an annual assessment of
the Group’s risk management and internal control systems for
presentation to the Committee. The review documents the
On behalf of the Board, the Committee considered quarterly reports
from the Valuations Committee, with particular focus on the
assumptions supporting the unquoted asset investments, any valuation
uncertainties and the proposed disclosure in the financial statements.
As in 2015, the 2016 Annual report includes a separate report from the
Valuations Committee. Details of the key valuation considerations and
the review and challenge undertaken in the year is included in the
Valuation Committee report on pages 79 to 81.
The Committee reviewed the carried interest payable and receivable as
part of the overall summary prepared alongside the 2016 Annual report.
The Committee reviewed the Half-yearly and Full Year financial
statements as well as the Quarterly Performance Updates with
management, focusing on the integrity and clarity of disclosure
so as to ultimately enable the Board to provide the fair, balanced
and understandable confirmation to shareholders in the 2016
Annual report.
A report summarising the considerations for the 2016 Annual report
was reviewed by the Audit Committee in advance of the year end and
a summary of the detailed procedures undertaken was prepared
alongside the 2016 Annual report.
The Committee was satisfied that maintenance of the Investment basis
financial statements was appropriate.
The external Auditor states in its audit report that the information given
in the FY2016 Strategic report and Corporate Governance report is
consistent with the financial statements.
components of the risk management and internal control
framework and highlights the key developments in the year,
along with commentary on their operation over the year. The
effectiveness of such controls is reviewed by Internal Audit, either
through dedicated procedures or in the course of other Internal
Audit reviews over the year. Group Compliance carries out desk
based monitoring, business unit and thematic reviews in relation
to compliance policies and other regulatory matters.
The Group maintains a framework of controls related to key
financial processes, including the preparation of consolidated
financial statements, and management of the associated risks.
The Group’s control policies and procedures, which are in
accordance with the Financial Reporting Council’s Guidance
on risk management, internal control and related financial and
business reporting have been in place throughout the financial
year and up to the date this report was approved.
78
3i Group Annual report and accounts 2016
Corporate Governance
Audit and Compliance Committee report
Internal audit
The Committee continued to monitor the scope, activity, and
resources of the Group’s internal audit function including whether
the current operating model remained effective and concluded
that it remained appropriate.
During the year the Committee approved the annual internal
audit plan and subsequent updates. It also received a quarterly
report from the Head of Internal Audit summarising the audits
concluded in the period and periodical updates on outstanding
agreed actions from previous reports. The Head of Internal Audit
meets the Committee privately as well as meeting regularly with
the Audit Committee Chairman throughout the year.
External audit
Ernst & Young LLP has been the Group’s statutory external auditor
since before the Group was listed on the London Stock Exchange
in 1994. The Committee assesses the independence and
objectivity, qualifications and effectiveness of Ernst & Young LLP
on an annual basis. The Committee also concludes on whether to
recommend to the Board the reappointment of Ernst & Young LLP
as auditor.
Auditor appointment and independence
The Committee recognises the importance of ensuring the
independence and objectivity of the Group’s auditor. It reviews
the nature and extent of the services provided by them, the level
of their fees and the element comprising non-audit fees.
The total audit fee for the year was £2.0 million (2015: £2.0 million).
The Committee is satisfied that this fee is appropriate in respect
of the audit services provided and that an effective audit can be
provided. The Committee oversees the Group’s policy on the
provision of non-audit services by the external auditor. The
Committee continues to see benefits for the Group in engaging
Ernst & Young LLP where:
– Work is closely related to the audit; or
– A detailed understanding of the Group is required; or
– Ernst & Young LLP is able to provide a higher quality and/or
better value service than other potential providers.
The Committee Chairman is notified of all assignments allocated
to Ernst & Young LLP over a defined limit, other than those related
to due diligence within the Group’s investment process. The key
principle of our policy is that permission to engage the external
auditor will always be refused when a threat to independence
and/or objectivity is perceived. Appointments in relation to the
investment process are independent of the audit team and are
reviewed separately by the Investment Committee but are
reported to the Audit and Compliance Committee Chairman.
Details of the non-audit fees paid to the auditors are disclosed
in Note 6 to the financial statements. The Committee concluded
that all of these fees fell within its criteria for engaging Ernst &
Young LLP and does not believe they pose a threat to the
auditor’s independence or objectivity.
Assessing external audit effectiveness
The Committee reviews the effectiveness of Ernst & Young LLP
through the use of questionnaires completed by management,
by considering the extent and quality of their contribution at its
meetings throughout the course of the year, and in one-to-one
meetings. The Committee Chairman met Ernst & Young LLP’s
Head of Audit Quality Assurance, together with their Head of
Financial Services Assurance Practice to discuss their approach to
audit quality, and what assurance had been taken in connection
with their audit of 3i.
The 2016 evaluation also reviewed the quality of the audit process,
the use of Ernst & Young LLP’s valuation practice to support the
audit of the portfolio valuations, the technical knowledge of the
team and the staff turnover within the Ernst & Young LLP audit
team and the Committee concluded that the audit was effective.
Audit tender
The Committee is cognisant of the requirements governing the
appointment of an external Auditor, notably the requirements of
the Competition and Markets Authority (“CMA”) in relation to the
mandatory re-tendering of audit services every 10 years, together
with the European Union’s requirements for mandatory firm
rotation. The Group confirms that it has complied with the
provisions of the CMA’s Order for the financial year under review.
During the year the Committee received regular updates on
the Group’s position on its external audit and potential tender.
Of particular interest to 3i was the Financial Reporting Council’s
consultation, released in September 2015, on the implementation
of the EU legislation and the application of the rules, particularly
around the components of an audit group. The scale of the
current engagement across the Group and its portfolio
companies with firms that may participate in any tender, as well
as the complexities around how the rules would apply to Private
Equity investments, meant that the Committee concluded that it
would be appropriate to use the full transitional arrangements in
relation to auditor rotation as outlined by the Financial Reporting
Council. The Committee currently expects that Ernst & Young LLP
will be retained until 2020 when mandatory rotation will be
required. As a result, Ernst & Young LLP replaced the lead audit
partner in March 2016 to enable continuity throughout the
period to 2020.
By order of the Board
C J Banszky
Chairman, Audit and Compliance Committee
18 May 2016
Further information on the Audit and Compliance Committee’s terms of reference
can be found at
www.3i.com
Valuations Committee report
3i Group Annual report and accounts 2016
79
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
“ A robust valuations process is
fundamental to the integrity of the Group’s
financial reporting. The Committee plays
an important role in providing the Board
with assurance that the valuation process
is solid and independently challenged.”
David Hutchison
Chairman, Valuations Committee
The Valuations Committee reports to the Audit and Compliance
Committee and the Board on the valuation of the Group’s
investment assets. It meets quarterly, to coincide with the
Group’s external financial reporting calendar. It reviews and
challenges the assumptions behind management’s proposed
investment asset valuation.
The Committee’s activity is principally focused on the Private
Equity investments as a high level of judgement is required to
value the unquoted portfolio. In light of the Group’s increased
capital allocation to Debt Management and the market volatility
seen in the second half of the year in particular, the Committee
also focused on the Group’s Debt Management CLO equity
portfolio and the principal drivers behind its valuation. As in
previous years, the Committee devoted limited time to
Infrastructure due to the fact that its principal investment is its
shareholding in the quoted 3i Infrastructure plc.
In advance of the full year and half-year reporting, management
hold individual portfolio company reviews with the respective
investment teams. Non-executive Directors, including members
of the Valuations Committee, attended a significant proportion
of all the meetings held in September 2015 and March 2016 and
were represented at all of the top five Private Equity portfolio
company review meetings.
As part of its external audit, Ernst & Young LLP undertakes a
separate review of the proposed investment portfolio valuation to
determine that the valuation policy is being complied with and
that there is consistent application and support for the underlying
assumptions. As part of their year-end audit, Ernst & Young LLP’s
specialist valuations teams independently reviewed a selection
of Private Equity and Debt Management investments to provide
further assurance on their overall audit conclusion on the
appropriateness of 3i’s portfolio valuation.
The Committee is responsible for keeping the Group’s valuation
policy under review and recommending any changes to the policy
to Audit and Compliance Committee and the Board. The policy
is reviewed at least annually with the last update in January 2016.
The Group’s valuation policy is based on the International Private
Equity and Venture Capital (“IPEV”) Guidelines which set out
recommended practice for fair valuing unquoted investments
within the IFRS framework.
Overview of the Valuation Process
The Committee receives a detailed report from the Group
Finance Director recommending a proposed valuation of the
Group’s investment portfolio. This report highlights the key
themes by business line and the main drivers of value movement
analysed between performance, multiple movements and other
factors. At each meeting the Committee also reviews selected
assets for detailed discussion; examples of such assets covered
during the year included Action, Basic-Fit, Scandlines, AES,
JMJ and Dynatect.
Membership during the year
Name
Membership status
David Hutchison (Chairman)
Sir Adrian Montague
Simon Thompson
Peter Grosch
Martine Verluyten
Simon Borrows
Julia Wilson
Chairman and Member since
December 2013
Member until June 2015
Member since April 2015
Member since January 2016
Member since 2012
Member since 2012
Member since 2009
Meetings are also attended by other members of the Executive
Committee as required, the Group Financial Controller and
the external Auditor. In addition the Chairman also met privately
with the external Auditor to discuss their approach to the year-
end audit.
80
3i Group Annual report and accounts 2016
Corporate Governance
Valuations Committee report
FY2016 update
The Committee focused on the following significant issues in the year:
Areas of judgement
What the Committee did
Private Equity
Earnings and multiple assumptions
The majority (74%) of the portfolio is valued using a multiple of earnings.
This requires judgement as the earnings of the portfolio company may
be adjusted so that they are considered “maintainable”.
There is also a significant degree of judgement in selecting the
appropriate set of comparable quoted companies to determine the
appropriate multiple to generate an enterprise value. Multiples are
selected by reference to quoted comparable companies, M&A
transactions and input in certain cases from corporate finance advisers.
Management also take into account growth profile, geographic
location, diversification and leverage/refinancing risk. The multiple
implied by the quoted comparable may be adjusted if the longer-term
view (cycle or exit plan) supports the use of more conservative multiples.
This has been a particularly important exercise in light of the increased
volatility experienced in the quoted equity markets over the period
under review.
Imminent sale assets
At any point in time a number of potential exit processes from the
portfolio may be underway. Judgement is applied by management as
to the likely eventual exit proceeds and certainty of completion. This
means that in some cases the valuation of an asset may not be moved
to an imminent sales basis until very shortly before completion; in other
cases the switch may occur on signing. However as a general rule the
valuation of an asset moves to an imminent sale basis only when a
process is materially complete and the remaining risks are estimated
to be minimal, taking into account the normal completion risk around
unquoted equity transactions.
Assets valued using a DCF basis
For assets valued using DCF techniques the key valuation judgements
relate to longer-term assumptions that drive the underlying business
plan and cash flows and appropriate discount rates.
Debt Management
CLO equity valuation process
The level of capital deployed into Debt Management investments at
31 March 2016 was £229 million (31 March 2015: £176 million). 66% of this
relates to investment in CLO equity where there is infrequent trading
and therefore little third-party evidence of value. Consequently,
judgement is required on the choice of basis to use for CLO valuations,
including use of broker marks and internal DCF models.
Earnings data is received monthly from Private Equity portfolio
companies and monitored closely by management. Actual earnings
may then be adjusted in management’s proposed valuations, for
example, to reflect a full year’s trading of an acquired business,
removing profit from discontinued activities or excluding exceptional
transaction costs. Material adjustments are highlighted to the
Committee in the quarterly report for review and approval.
Management continued to adjust a significant proportion of multiples
used if the longer-term view (exit or multiple) supports the use of a
different multiple. Notable changes in multiples in a quarter are
presented to the Committee and adjustments are reviewed by the
Committee at each meeting. Ernst & Young LLP also specifically review
and consider the appropriateness of a sample of these adjustments
and reports to the Committee.
Assets that are within active sales processes are reviewed by the
Committee including details such as the timeline to potential
completion, the number and make-up of bidders for investments,
execution and due diligence risks and regulatory or competition
clearance issues. Management propose a treatment for each asset
which the Committee reviews.
Material assumptions and significant changes to these assumptions
are reviewed by the Committee. This may include third-party support
if available. Sensitivity to assumptions is also noted.
Discount rates are selected by management with reference to market
transactions, weighted average cost of capital calculations and other
public data. Any material changes are reviewed by the Committee
and external advice is sought from time to time.
Reflecting the market volatility in the second half of the year,
management increased the level of information provided to the
Committee to allow it to assess the appropriateness of the valuations.
This included input from the relevant credit teams regarding the
underlying assets. The use by management of independent data, such
as broker marks supporting the proposed valuations increased and
broker marks are the primary data point to determine fair value. The
quarterly valuation report includes a range indicated from all available
data points, including internal DCF models, against the proposed
valuation. The range and actual values are reviewed by the Committee.
Ernst & Young LLP also selected a sample of CLOs for valuation by
their valuation specialists in order to review the appropriateness of
management‘s valuation and included their results in a report to
the Committee.
3i Group Annual report and accounts 2016
81
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
As part of its challenge and review process, the Committee:
– Considered the management information provided to support
the Committee’s review of the portfolio valuation, including the
strength and operation of the internal controls and
management’s responses to any challenges raised by the
Committee members or Ernst & Young LLP;
– Sought assurance from the external Auditor as to whether and
how it had considered each of these areas;
– Reviewed the consistency of the views of management and the
external Auditor.
The Committee was satisfied that the application of the policy
and process was appropriate during the applicable period, and
recommended the portfolio valuation to the Audit and
Compliance Committee and the Board at each quarter end for
approval by the Board.
Portfolio trends
As noted in the prior year’s report, at least annually the
Committee Chairman and management conduct a review of the
valuation outcomes in the portfolio over the preceding three
years. The Committee Chairman and Group Finance Director
reported to the Board in May 2016 on the key observations.
By order of the Board
D A M Hutchison
Chairman, Valuations Committee
18 May 2016
Further information on the Valuation Committee’s terms
of reference can be found at
www.3i.com
82
3i Group Annual report and accounts 2016
Corporate Governance
Directors’ remuneration report
“ We remain committed to maintaining a
remuneration framework which supports
the achievement of our strategic
objectives.”
Jonathan Asquith
Chairman, Remuneration Committee
Investment
Throughout the period, management continued its disciplined
and selective approach to investment. Despite this, the
investment momentum seen in FY2015 continued through FY2016
with three key investments completed in Private Equity: Weener
Plastic; Euro-Diesel; and Audley Travel. The Infrastructure business
also completed four new investments, while Debt Management
successfully completed £1.3 billion of new CLO issuance in
the year.
Operating profit
Annual operating cash profits improved from £28 million
in FY2015 to £37 million in FY2016, which was significantly
above target.
Strategy and people
The strategic re-positioning of the Infrastructure business and
related team hires enabled the business to expand its capabilities
and deliver on a broader investment mandate.
2013–16 Performance
Shortly after Simon Borrows was appointed as Chief Executive in
2012 and as part of the three-year strategic plan that was set out
at that time, the terms of the LTIP scheme were discussed and
supported by our larger shareholders. In order to ensure that
management remained focused on delivering the three-year
turnaround in the business, it was decided that the 2013 LTIP
award would be split with 50% relating to Total Shareholder
Return over the three-year performance period and 50% equally
divided between two strategic objectives concerning the
restructuring of the cost base and the elimination of the annual
operating cash deficit which had been an unwelcome feature of
the business in prior years. The three-year performance period for
this award started on 1 April 2013 and ended on 31 March 2016.
Total Shareholder Return over the three-year period was 20.2%,
well above the maximum target of 18%. For the two strategic
objectives, the Committee has concluded that the performance
has been either good or exceptional and therefore most of the
award aligned to these objectives will vest. More detail on the
performance can be found on page 87.
Statement by the Remuneration
Committee Chairman
As Remuneration Committee Chairman, I am pleased to introduce
the Directors’ remuneration report for the financial year 1 April
2015 to 31 March 2016 (“the year”) and to provide some details of
the background against which the Committee’s decisions have
been taken in the year. References to “the current year” or
“FY2017” relate to the financial year 1 April 2016 to 31 March 2017.
At our 2014 Annual General Meeting, our Remuneration policy
was approved. That policy has served us well and we are not
proposing any changes to it at this time. The policy is available on
our website www.3i.com/investor-relations/results-and-reports/
reports.
Performance in the year
I am pleased to report, as you will have read earlier in this
Annual report, that this has been another successful year for
the Company. The business has continued to execute its well
established strategy and performed resiliently in the face of
volatile macro-economic conditions. Robust unrealised value
growth, particularly in our largest and strongest investments,
such as Action, Scandlines and 3i Infrastructure plc, together with
a good flow of realisations and continued cost discipline, have
driven an excellent total return on opening shareholders’ funds
of 21.7% (2015: 19.9%).
The strong performance of the Company has been reflected in
the Committee’s decisions concerning the Executive Directors’
remuneration. Further information on this assessment is provided
on pages 84 to 87. Highlights of these achievements include:
Portfolio return
Exceptional performance of the Private Equity portfolio as well as
good returns from the Infrastructure portfolio generated a gross
investment return of £1,069 million (2015: £805 million) or 28% of
opening portfolio value. This materially exceeded target and
higher than the previous year (2015: 23%).
3i Group Annual report and accounts 2016
83
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Regulatory changes in the year
During FY2016, 3i has worked to ensure that it continues to
comply with changes in regulation. The Group must comply with
the Alternative Investment Fund Managers Directive, which
requires the Company to deliver variable remuneration to certain
staff in a particular form. The two Executive Directors are
considered to be AIFMD Identified Staff and, as such, 60% of their
annual bonuses will be delivered in 3i Group plc shares deferred
for four years (and which vest one quarter per annum over those
four years). The remaining 40% will be delivered half in cash bonus
and half in 3i Group plc shares which are subject to a six-month
retention period.
The Committee has reviewed the malus provision, which remains
substantially unchanged, and introduced a clawback policy,
which is shown on page 91, complying with the new requirements
of the UK Corporate Governance Code.
Committee priorities and potential changes
in the current year
The Committee remains committed to maintaining a
remuneration framework which rewards progress in meeting the
Group’s strategic objectives. We will continue to monitor and
comply with relevant guidelines and regulatory changes.
The Remuneration policy was approved in 2014 and is now in its
third year of operation. The policy will be reviewed during the year
and be presented to shareholders for approval at the 2017 AGM.
If there are any substantial changes to the policy we will consult
with major shareholders and the appropriate institutional groups.
Jonathan Asquith
Chairman, Remuneration Committee
18 May 2016
84
3i Group Annual report and accounts 2016
Corporate Governance
Directors’ remuneration report
Policy report
The policy, as set out in the 2014 Directors’ remuneration report, was formally approved by shareholders at the 2014 Annual General
Meeting on 17 July 2014. No amendments to the policy are proposed for the current year and so shareholders will not be asked to vote
on the policy at the 2016 Annual General Meeting.
The policy is available on our website at www.3i.com/investor-relations/results-and-reports/reports.
The Annual report of remuneration (Implementation report)
Director remuneration for the year
Single total figure of remuneration for each Director
£’000
fees Benefits Pension
Salary/
S A Borrows
J S Wilson
S Thompson
Sir Adrian Montague
J P Asquith
C J Banszky
A R Cox
P Grosch
D A M Hutchison
R H Meddings
M G Verluyten
579
421
239
70
122
103
50
69
91
–
74
15
18
–
–
–
–
–
–
–
–
–
16
44
–
–
–
–
–
–
–
–
–
Annual
bonus
2,159
902
–
–
–
–
–
–
–
–
–
FY2016
LTIP
Total
fees Benefits Pension
Salary/
FY2015
LTIP
(no
performance
condition)
LTIP
(performance
condition)
Annual
bonus
Total
3,052 5,821
1,387 2,772
239
70
122
103
50
69
91
–
74
–
–
–
–
–
–
–
–
–
562
409
–
295
111
61
80
–
92
27
72
15
17
–
–
–
–
–
–
–
–
–
15
45
–
–
–
–
–
–
–
–
–
2,096
850
–
–
–
–
–
–
–
–
–
696
–
–
–
–
–
–
–
–
–
–
4,894
8,278
2,225 3,546
–
295
111
61
80
–
92
27
72
–
–
–
–
–
–
–
–
–
– Benefits include a car allowance, provision of health insurance and, for Mrs Wilson, the value of the Share Incentive Plan matching
share awards.
– Mr Borrows and Mrs Wilson received salary supplements in lieu of pension contributions of £16k and £44k respectively.
– Annual bonus awards made in respect of the year are delivered as 60% payable in shares deferred for four years, and the remaining
40% being half as a cash payment immediately and half as 3i Group plc shares which are subject to a six-month retention period.
All annual bonus awards are subject to the malus/clawback policy. Those shares deferred for four years are released in four equal
annual instalments over the four years commencing June 2017 and all share awards carry the right to receive dividends and other
distributions.
– In the case of Ms Banszky the sum shown (which includes VAT) was paid to her principal employer, the Law Debenture Corporation
p.l.c., which released her to serve as a non-executive Director.
– In the case of Mr Grosch the sum shown includes €50k of fees paid to him by EURO-DIESEL (a 3i portfolio company) for his role
as Chairman.
– In addition to the table above, dividends on invested deferred share awards were paid during the year (Mr Borrows £150k,
Mrs Wilson £50k).
– The values shown in the LTIP represent the performance shares vesting from the 2013 LTIP, together with the value of accrued
dividends on those shares. The shares have been valued using the 31 March 2016 closing share price (456.4 pence). Further detail is
provided on page 87.
– The fees shown for the non-executive Directors include fees used to purchase shares in the Company.
– In addition to the fees shown above, Mr Borrows retained directors’ fees of £68k from The British Land Company PLC and £32k from
Inchcape plc, and Mrs Wilson retained directors’ fees of £105k from Legal and General Group plc.
3i Group Annual report and accounts 2016
85
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
FY2016 Annual bonus
The annual bonuses for Executive Directors for the year were awarded against a balanced scorecard of both financial and strategic
measures agreed by the Committee in May 2015. The Committee uses the scorecard as a prompt and guide to judgement and
considers the performance outcomes in the wider context of personal performance (including values and behaviours) risk, market
and other factors.
The performance achieved against the scorecard metrics supports the commentary within this Annual report and accounts that FY2016
was another exceptionally strong year. Highlights included:
– Materially higher gross investment return of 28% against a target of 15% on opening portfolio value;
– Significant new investments across all business areas, while maintaining a disciplined and selective approach to investment
opportunities; and
– Positive operating cash profit significantly above target and higher than FY2015.
FY2016 has been an exceptional year, with performance being significantly ahead of targets and expectations across the Company.
86
3i Group Annual report and accounts 2016
Corporate Governance
Directors’ remuneration report
FY2016 Performance
Area of
strategic
focus
Weighting
(%)
Metrics considered
Target/Expectation
Performance1 Comments
Gross investment return
(% of opening portfolio value)
T
Portfolio
return
50%
Private Equity cash income
3iN investment return
3iN return of capital
New capital invested in
Private Equity
Investment
25%
New CLO issuance in Europe
and US
Operating
profit
10%
New 3iN capital committed
in Core/PPP
Operating cash profit
Operating costs as a
percentage of AUM
Group underlying FM profits
(margin %)
T
T
T
E
E
E
T
T
T
£563m (15%)
£1,069m (28%) Gross investment return materially exceeded
£31m
8% to 10%
£51m
£50m
14%
£51m
target and surpassed that of the previous
financial year.
Interest and dividends generated from Private
Equity were strong.
3iN’s investment return outperformed its target.
Payment of special dividend by 3iN in July 2015.
€500m – €750m €497m/£365m Private Equity investment levels in line with prior
n/a*
£1.3bn
n/a*
£23m
£193m
£37m
1.0%
1.0%
year while maintaining a disciplined and selective
approach to new investments.
Continued growth in CLO assets under
management despite more challenging global
credit conditions, which also impacted 3i’s
mark-to-market returns.
New 3iN investment commitments in line
with target.
Operating cash profit for the year was above
target and showed strong performance and
growth compared with FY2015.
Operating costs remained steady vs prior year.
£22m (18%)
£27m (22%)
Underlying FM profits above target.
Strategy and
people
15%
Achievement of strategy and people targets is measured
against a balanced scorecard of objectives set by the
Remuneration Committee
Continued growth and development of business
post the three-year strategic restructuring plan
completed in FY2015.
Positive feedback from shareholders who
continue to be supportive of the progress and
development of the business achieved during
the year.
Completion of strategic re-positioning of the
Infrastructure business to broaden investment
mandate and expand capabilities.
Completed acquisition of the minority
shareholdings in DM Europe and DM US allowing
Group to become the 100% owner of the Debt
Management business.
Development, retention and succession plans
for the Group’s key talent and leadership team
in place and progressing according to plan.
1 All numbers are under the Investment basis.
T = Target E = Expectation
* Some expectations are not disclosed as they are commercially sensitive.
Consistent with last year, the Board set expectations rather than targets for some metrics. This is because the timing of acquisitions and
disposals is highly sensitive to market conditions, and a more prescriptive approach would run the risk of creating perverse incentives
for executives. For example, to achieve a target level of realisations may result in the earlier sale of assets than would otherwise be
appropriate, or to achieve a target level of investments may result in investing at inflated prices. In practice, the Board’s expectations in
these areas were met or exceeded in each case.
In light of the achievements detailed above, and the exceptional performance of the Group in the year, the Committee awarded
Mr Borrows a bonus in respect of FY2016 of £2,158,932 (being 92.5% of his maximum bonus opportunity), and awarded Mrs Wilson a
bonus in respect of FY2016 of £901,765 (being 85% of her maximum bonus opportunity). In each case, 20% of the award will be paid in
cash immediately, 20% will be delivered as shares with a retention period of six months and the remaining 60% will be deferred into the
Company’s shares vesting in equal instalments over four years. Annual bonus awards are subject to the malus and clawback policy.
3i Group Annual report and accounts 2016
87
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Share awards subject to performance conditions vesting in 2016 subject to performance conditions
2013 Long-term incentive award
The long-term incentive awards granted in June 2013 to Mr Borrows and Mrs Wilson were subject to performance conditions based on
absolute Total Shareholder Return and targets related to aligning costs with income and ensuring a fairer split of returns between
shareholders and employees over the three financial years to 31 March 2016. The table below shows the achievement against these
conditions and the resulting proportion of the awards which will vest in June 2016.
Total Shareholder Return measure
% Performance
% vesting
Performance
% vesting
Performance
% vesting
Absolute Total Shareholder Return
50%
10% p.a.
20%
18% p.a.
100%
20.2%
100%
Weighting
Threshold
Maximum
Actual
Strategic Measure
Weighting Performance
Progress achieved covering the Group’s
operating costs relative to fee income
Progress achieved in reducing
remuneration costs relative to fee income
25% An Operating cash profit was achieved in each of the three performance
years of £5m (FY14), £28m (FY15) and £37m (FY16).
25% Remuneration costs have been reduced from £98m in FY13 to £83m in
92%
FY16. Remuneration costs as a percentage of fee income have been
reduced from 70% to 61% over the performance period, as compared to
an expectation of a reduction to 60%.
% vesting
100%
The table below shows the grants made to each Executive Director on 10 June 2013 at a share price of 358.7 pence and the resulting
number of shares that will vest due to the achievement against the performance targets as set out above. The value of the shares
vesting has been included in the single figure table using the 31 March 2016 closing share price of 456.4 pence.
Basis of award at grant
S A Borrows
J S Wilson
Face value award of 4 times base salary of £550k
Face value award of 2.5 times base salary of £400k
Number of
shares
awarded at
358.7p per
share
613,325
278,784
Face value at
grant
£2,200k
£1,000k
% vesting
Number of
shares vesting
Value of share
vesting at
456.4p per
share
98%
98%
601,058
273,208
£2,743k
£1,247k
The proportion of the award vesting will be released 50% in September 2016, 25% in June 2017 and 25% in June 2018 together with the
value of dividends that would have been received during the period from grant to the release date. Dividends totalling 51.4p per share
were accrued from 1 June 2013 to 31 March 2016. The value of the accrued dividend on the shares vesting is £309k for Mr Borrows and
£140k for Mrs Wilson.
Change in the remuneration of the Chief Executive compared to other employees
The table below shows the percentage change in remuneration awarded to the Chief Executive and employees as a whole,
between the year to 31 March 2015 and the year to 31 March 2016.
Chief Executive
All other employees
Salary
Benefits
Bonus
3%
5%
0%
0%
3%
13%
88
3i Group Annual report and accounts 2016
Corporate Governance
Directors’ remuneration report
Details of share awards granted in the year
LTIP
Performance share awards were granted to the two Executive Directors during the year as shown in the table below.
Description of award
A performance share-based award, which releases shares, subject to satisfying the three year performance conditions,
50% on the third anniversary of grant and 25% on the fourth and fifth anniversaries.
Face value
Performance period
Performance targets
Remuneration Committee
discretion
Chief Executive – 400% of salary, being 418,768 shares.
Group Finance Director – 250% of salary, being 190,349 shares.
The share price used to make the award was the average mid-market closing price over the five working days
starting with the day of the announcement of the 2015 annual results (541.1p).
1 April 2015 to 31 March 2018.
50% of the award is based on absolute TSR measured over the performance period, and vests:
– 0% vesting below 10% p.a. TSR;
– 20% vesting at 10% p.a. TSR;
– Straight-line vesting between 10% and 18% p.a. TSR; and
– 100% vesting at 18% p.a. TSR.
50% of the award is based on relative TSR measured against the FTSE 350 Index over the performance period,
and vests:
– 0% vesting for below median performance against the index;
– 25% vesting for median performance against the index;
– 100% vesting for upper quartile performance against the index; and
– Straight-line vesting between median and upper quartile performance.
The Committee can reduce any award which would otherwise vest if gross debt or gearing targets are missed.
Deferred bonuses awarded in FY2016
Under the Deferred Bonus Plan, share awards were granted to the Executive Directors on 4 June 2015 in respect of FY2015
performance with a face value of £1,048,000 (193,680 shares) for the Chief Executive and £425,000 (78,519 shares) for the Group Finance
Director. These face values were reported in the 2015 single figure of remuneration for each Director. The share price used to calculate
face value was the average of the mid-market closing prices over the five working days starting with the date of the announcement of
the Company’s results for the year ended 31 March 2015 (14 May 2015 to 20 May 2015), which was 541.1 pence. These awards are not
subject to further performance conditions and vest in four equal instalments annually from 1 June 2016.
Share Incentive Plan
During the year, Mrs Wilson participated in the HMRC approved Share Incentive Plan which during the year allowed employees to
invest up to £150 per month from pre-tax salary in ordinary shares (“partnership shares”). For each partnership share, the Company
grants two free ordinary shares (“matching shares”) which are normally forfeited if employment ceases within three years of grant.
Dividends are reinvested in further ordinary shares (“dividend shares”). During the year Mrs Wilson purchased 367 partnership shares,
and received 734 matching shares and 530 dividend shares at prices ranging between £4.3297 and £5.5633 per share, with an average
price of £4.9489.
Pension arrangements
Mr Borrows and Mrs Wilson received salary supplements in lieu of pension of £16k and £44k respectively.
Payments to past Directors
No payments were made to past Directors in the year.
Payments for loss of office
No payments to Directors for loss of office have been made in the year.
3i Group Annual report and accounts 2016
89
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Statement of Directors’ shareholding and share interests
The Company’s share ownership and retention policy requires Executive Directors to build up over time, and thereafter maintain,
a shareholding in the Company’s shares equivalent to at least 3.0 times gross salary in the case of the Chief Executive and 1.5 times
gross salary for the Group Finance Director. In addition, shareholding targets have been introduced for other members of
Executive Committee of 1.5 times their gross salaries and for partners in the Group’s businesses of 1.0 times their gross salaries.
Details of Directors’ interests (including interests of their connected persons) in the Company’s shares as at 31 March 2016 are shown
below. The share price on 31 March 2016 was £4.564.
S A Borrows3
J S Wilson3
S Thompson3
J P Asquith3
C Banszky3
P Grosch3
D Hutchison3
M G Verluyten3
Owned
outright1
Deferred
shares2
Subject to
performance
Shareholding
requirement
Current
shareholding
(% salary)
10,140,192
200,625
1,858,150
760,287
986,217
448,280
300%
150%
7,931%
216%
Shares owned outright
41,156
14,001
6,000
1,249
56,966
21,000
From 1 April 2016 to 1 May 2016, Mrs Wilson became interested in a further 31 shares overall outright (SIP Partnership Shares) and a further 62 deferred shares
(SIP Matching Shares). There were no other changes to Directors’ share interests in that period.
1 The share interests shown for Mrs Wilson include shares held in the 3i Group Share Incentive Plan. The owned outright column includes partnership and
dividend shares under the SIP. The deferred shares column includes matching shares under the SIP.
2 The number of deferred shares shown include the proportion of the 2012 and 2013 Performance Share awards that have vested due to meeting the relevant
performance conditions but have not yet been released.
3 Directors are restricted from hedging their exposure to the 3i share price.
Performance graph and table
TSR Graph
This graph compares the Company’s total shareholder return for the seven financial years to 31 March 2016 with the total shareholder
return of the FTSE 250 Index, which reflects the Company’s portfolio of international investments.
3i total shareholder return vs FTSE 250 total return over the seven years to 31 March 2016
450
400
350
300
250
200
150
100
50
0
2009
2010
2011
2012
2013
2014
2015
2016
3i Group
FTSE 250
Rebased at 100 at 31 March 2009
90
3i Group Annual report and accounts 2016
Corporate Governance
Directors’ remuneration report
Table of historic Chief Executive data
Year
FY2016
FY2015
FY2014
FY20131
FY2012
FY2011
FY2010
Chief
Executive
S A Borrows
S A Borrows
S A Borrows
S A Borrows
M J Queen
M J Queen
M J Queen
M J Queen
Single figure
of total
remuneration
£’000
Percentage
of maximum
bonus paid
Percentage
of maximum
LTIP vesting
5,821
8,278
3,222
2,932
429
641
1,305
1,989
92.5%
92.5%
92.5%
90%
0%
0%
54%
75%
98%
90.85%
0%
n/a
0%
0%
0%
0%
1 M J Queen ceased to be a Director on 16 May 2012. Mr Borrows was appointed Chief Executive on 17 May 2012 having previously been
Chief Investment Officer.
Relative importance of spend on pay
Remuneration of all employees
Dividends paid to shareholders
2015/16
£83m
£190m
2014/15
£85m
£183m
Change
%
(2)%
4%
Statement of implementation of the remuneration policy in the coming year
The table below sets out how the Committee intend to operate the remuneration policy in FY2017.
Policy element
Base salary
Pension
Benefits
Annual bonus
Implementation of policy during FY2017
A Group-wide 3% increase to salaries will take place in FY2017, which will also be applied to Executive Director salaries.
Effective from 1 July 2016, salaries for the Executive Directors will therefore be as follows:
– Chief Executive: £601,000
– Group Finance Director: £437,090
No changes to the current arrangements are proposed for FY2017. The Executive Directors will continue to receive a
pension contribution or salary supplement as follows:
– Chief Executive: £15k
– Group Finance Director: 12% of salary
No changes to the current arrangements are proposed for FY2017.
Benefits will continue to include a car allowance, provision of health insurance and any Share Incentive Plan matching
share awards.
The maximum annual bonus opportunities for FY2017 will remain unchanged, in line with the remuneration policy,
as follows:
– Chief Executive: 400% of salary
– Group Finance Director: 250% of salary
Awards over 75% of this maximum will be made only in exceptional circumstances.
Any bonus will be awarded based on a balanced scorecard of both financial and strategic measures agreed by the
Committee, alongside a consideration of the wider context of personal performance (including values and behaviours),
risk, market and other factors.
Measures for the FY2017 scorecard are based 90% on financial measures (50% portfolio return, 30% investment
management and 10% operating performance) and 10% on strategic and people objectives. They are calibrated to
current business strategy and will evolve year on year as the Group’s situation and priorities develop.
The Committee considers that the specific targets and expectations contained within the FY2017 scorecard are
commercially sensitive and therefore will not be disclosed in advance. We will report to shareholders next year on
performance and the resulting bonus outturns.
At least 50% of any bonus award will be deferred into shares vesting in equal instalments over four years.
Awards are subject to the Company’s malus and clawback policy.
3i Group Annual report and accounts 2016
91
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Policy element
Long-term
incentive plan
Shareholding
requirements
Non-executive
Director fees
Malus and
clawback policy
Implementation of policy during FY2017
Awards under the long-term incentive plan in FY2017 will be made as follows:
– Chief Executive: 400% of salary
– Group Finance Director: 250% of salary
Performance will be measured over a three-year period and will be determined by the Remuneration Committee.
Performance measures remained unchanged from the previous year and will be as follows:
50% of the award is based on absolute TSR measured over the performance period, and vests:
– 0% vesting below 10% p.a. TSR;
– 20% vesting at 10% p.a. TSR;
– Straight-line vesting between 10% and 18% p.a. TSR; and
– 100% vesting at 18% p.a. TSR.
50% of the award is based on relative TSR measured against the FTSE 350 Index over the performance period,
and vests:
– 0% for below median performance against the index;
– 25% for median performance against the index;
– 100% for upper quartile performance against the index; and
– Straight-line vesting between median and upper quartile performance.
Awards are subject to the Company’s malus and clawback policy.
No changes to the current arrangements are proposed for FY2017. Shareholding requirements will therefore remain
as follows:
– Chief Executive: 300% of salary
– Group Finance Director: 150% of salary
No changes to the current arrangements are proposed for FY2017. Fees for the non-executive Directors will therefore
remain as follows:
Chairman fee:
£265,000 plus £30,000 in 3i shares
Non-executive Directors:
Board membership fee:
Deputy Chairman (including SID fee)
Senior Independent Director fee:
Committee chairman:
Committee member:
£50,000 plus 3,000 3i shares
£40,000
£10,000
£20,000
£8,000
Committee fees are payable in respect of the Audit and Compliance Committee, Remuneration Committee
and Valuations Committee.
Long-term incentive awards and deferred bonus share awards made during the year to Executive Directors (and certain
other Senior Executives), may be forfeited or reduced prior to vesting in exceptional circumstances on such basis as the
Committee considers fair, reasonable and proportionate. This would include, but is not limited to, material
misstatement of Group financial statements, or cases where an individual is deemed to have caused a material loss for
the Group as a result of reckless, negligent or wilful actions or inappropriate values or behaviour.
The Group may recover amounts that have been paid or released from awards (including cash bonus awards), as long
as a written request for the recovery of such sums is made in the two-year period from the date of payment or release
and in circumstances where either (a) there has been a material misstatement of Group financial statements or (b) the
Group suffers a material loss, and (in either case) the Committee considers that there is reasonable evidence to show
that the misstatement or loss has been caused by the individual’s reckless, negligent or wilful actions or inappropriate
values or behaviours.
92
3i Group Annual report and accounts 2016
Corporate Governance
Directors’ remuneration report
Consideration by the Directors of matters relating to Directors’ remuneration
The following Directors were members of the Remuneration Committee during the year:
Remuneration Committee
Name
Role
Membership status
J P Asquith (Chairman)
Non-executive Director
C J Banszky
A R Cox
D A M Hutchison
Non-executive Director
Non-executive Director
Non-executive Director
Member since March 2011
Chairman since May 2011
Member since November 2015
Member until November 2015
Member since December 2013
The Committee’s terms of reference are available on the Company’s website.
Meetings
attended
in the year
Meetings
eligible to
attend
in the year
6
1
5
6
6
1
5
6
The Committee appointed Deloitte LLP as advisers in 2013 and during the year they provided the Committee with external,
independent advice.
Deloitte are members of the Remuneration Consultants Group and as such, voluntarily operate under the code of conduct in relation
to executive remuneration consulting in the UK. During the year, Deloitte LLP also provided 3i with certain tax advisory services.
The Committee has reviewed the advice provided to it during the year and is satisfied that it has been objective and independent.
Deloitte’s total fees for advice given to the Committee during the year were £44,900 (excluding VAT).
The Chief Executive, the Remuneration Director and the General Counsel, Company Secretary & Head of HR attend Committee
meetings by invitation, other than when their personal remuneration is being discussed.
Shareholder voting on remuneration
At the 2015 AGM, shareholders approved the Remuneration report that was published in the 2015 Annual report and accounts. At the
2014 AGM, shareholders approved the Directors’ remuneration policy. The results for both of these votes are shown below:
Resolution
Approval of the Directors’ remuneration report at the 2015 AGM
Approval of the Directors’ remuneration policy at the 2014 AGM
Votes
for
Votes
against
Total votes
cast
Votes
withheld
685,019,657
(94.95%)
701,059,781
(98.10%)
36,419,909
(5.05%)
13,563,200
(1.90%)
721,439,566
3,769,969
714,622,981
1,798,709
Audit
The tables in this report (including the Notes thereto) on pages 84 to 90 have been audited by Ernst & Young LLP.
By order of the Board
Jonathan Asquith
Chairman, Remuneration Committee
18 May 2016
Financial statements
Consolidated statement
of comprehensive income
for the year to 31 March
3i Group Annual report and accounts 2016
93
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Realised profits over value on the disposal of investments
Unrealised profits on the revaluation of investments
Fair value movements on investment entity subsidiaries
Portfolio income
Dividends
Income from loans and receivables
Fees receivable
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Operating expenses
Interest received
Interest paid
Movement in the fair value of derivatives
Exchange movements
(Expense)/income from investment entity subsidiaries
Carried interest
Carried interest and performance fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit before tax
Income taxes
Profit for the year
Other comprehensive income/(expense) that may be reclassified to the income statement
Exchange differences on translation of foreign operations
Other comprehensive expense that will not be reclassified to the income statement
Re-measurements of defined benefit plans
Other comprehensive income for the year
Total comprehensive income for the year (“Total return”)
Earnings per share
Basic (pence)
Diluted (pence)
Dividend per share
Interim dividend per share paid (pence)
Final dividend per share (pence)
Notes
2
3
11
4
13
13
7
26
8
8
9
9
2016
£m
11
92
591
58
26
8
41
827
79
(132)
4
(47)
–
65
(10)
78
(40)
(5)
819
(2)
817
13
(6)
7
824
85.6
85.2
6.0
16.0
2015
£m
54
236
530
36
38
6
(49)
851
80
(122)
3
(49)
(1)
(61)
1
80
(72)
(8)
702
(2)
700
(27)
(14)
(41)
659
73.9
72.9
6.0
14.0
94
3i Group Annual report and accounts 2016
Financial statements
Consolidated statement of financial position
as at 31 March
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investments in investment entity subsidiaries
Investment portfolio
Carried interest and performance fees receivable
Other non-current assets
Intangible assets
Retirement benefit surplus
Property, plant and equipment
Deferred income taxes
Total non-current assets
Current assets
Carried interest and performance fees receivable
Other current assets
Deposits
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
Retirement benefit deficit
Deferred income taxes
Provisions
Total non-current liabilities
Current liabilities
Trade and other payables
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
Current income taxes
Provisions
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Capital redemption reserve
Share-based payment reserve
Translation reserve
Capital reserve
Revenue reserve
Own shares
Total equity
Simon Thompson
Chairman
18 May 2016
Notes
2016
£m
2015
£m
10
10
11
13
15
14
26
7
13
15
18
13
16
26
7
17
18
13
16
17
19
20
297
1,243
2,680
4,220
89
37
12
132
5
3
4,498
28
31
40
957
1,056
5,554
(27)
(85)
–
(575)
(20)
–
(1)
(708)
(99)
(20)
(1)
(262)
(2)
(7)
(391)
(1,099)
4,455
719
784
43
32
229
2,080
622
(54)
4,455
399
1,272
2,079
3,750
43
21
19
136
4
3
3,976
45
33
–
861
939
4,915
(25)
(72)
(10)
(815)
(19)
(1)
(5)
(947)
(127)
(13)
(17)
–
(2)
(3)
(162)
(1,109)
3,806
719
784
43
31
216
1,519
573
(79)
3,806
Consolidated statement
of changes in equity
for the year to 31 March
3i Group Annual report and accounts 2016
95
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
2016
Total equity at the start of the year
Profit for the year
Exchange differences on translation
of foreign operations
Re-measurements of defined benefit plans
Total comprehensive income for the year
Share-based payments
Release on forfeiture of share options
Exercise of share awards
Ordinary dividends
Additional dividends
Total equity at the end of the year
2015
Total equity at the start of the year
Profit for the year
Exchange differences on translation
of foreign operations
Re-measurements of defined benefit plans
Total comprehensive income for the year
Share-based payments
Release on forfeiture of share options
Exercise of share awards
Ordinary dividends
Additional dividends
Issue of ordinary shares
Total equity at the end of the year
Share
capital
£m
Share
premium
£m
Capital
redemption
reserve
£m
Share-
based
payment
reserve
£m
Translation
reserve
£m
Capital
reserve
£m
Revenue
reserve
£m
719
784
43
31
216
1,519
705
573
112
Own
shares
£m
(79)
–
–
–
13
13
–
15
(14)
719
784
43
32
229
(6)
699
(25)
(113)
2,080
112
14
(77)
–
25
622
(54)
Share
capital
£m
Share
premium
£m
Capital
redemption
reserve
£m
Share-
based
payment
reserve
£m
Translation
reserve
£m
Capital
reserve
£m
Revenue
reserve
£m
718
782
43
19
243
1,050
599
542
101
Own
shares
£m
(89)
–
–
–
(27)
(27)
–
19
(7)
(14)
585
(10)
(106)
101
7
(77)
–
10
1
719
2
784
43
31
216
1,519
573
(79)
Total
equity
£m
3,806
817
13
(6)
824
15
–
–
(77)
(113)
4,455
Total
equity
£m
3,308
700
(27)
(14)
659
19
–
–
(77)
(106)
3
3,806
96
3i Group Annual report and accounts 2016
Financial statements
Consolidated cash flow statement
for the year to 31 March
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Cash inflow from investment entity subsidiaries
Net cash flow from derivatives
Portfolio interest received
Portfolio dividends received
Portfolio fees received
Fees received from external funds
Carried interest and performance fees received
Carried interest and performance fees paid
Acquisition related earn-out charges paid
Operating expenses
Income taxes paid
Net cash flow from operating activities
Cash flow from financing activities
Issue of shares
Repurchase of B shares
Dividend paid
Interest received
Interest paid
Net cash flow from financing activities
Cash flow from investing activities
Purchases of property, plant and equipment
Net cash flow from deposits
Net cash flow from investing activities
Change in cash and cash equivalents
Cash and cash equivalents at the start of year
Effect of exchange rate fluctuations
Cash and cash equivalents at the end of year
2016
£m
2015
£m
(87)
236
206
(14)
5
58
7
78
52
(13)
(30)
(134)
–
364
–
–
(190)
4
(51)
(237)
(1)
(40)
(41)
86
861
10
957
(116)
270
272
9
14
35
10
77
6
(14)
(10)
(116)
(5)
432
3
(6)
(183)
3
(54)
(237)
–
–
–
195
674
(8)
861
Company statement of financial position
as at 31 March
Assets
Non-current assets
Investments
Quoted investments
Unquoted investments
Investment portfolio
Carried interest and performance fees receivable
Interests in Group entities
Other non-current assets
Total non-current assets
Current assets
Carried interest and performance fees receivable
Other current assets
Derivative financial instruments
Deposits
Cash and cash equivalents
Total current assets
Total assets
Liabilities
Non-current liabilities
Carried interest and performance fees payable
Acquisition related earn-out charges payable
Loans and borrowings
B shares
Total non-current liabilities
Current liabilities
Trade and other payables
Acquisition related earn-out charges payable
Loans and borrowings
Derivative financial instruments
Current income taxes
Total current liabilities
Total liabilities
Net assets
Equity
Issued capital
Share premium
Capital redemption reserve
Share-based payment reserve
Capital reserve
Revenue reserve
Treasury shares
Total equity
1 Restated. See Note 31 of the financial statements.
Simon Thompson
Chairman
18 May 2016
3i Group Annual report and accounts 2016
97
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Notes
2016
£m
2015
(restated)1
£m
1/4/2014
(restated)1
£m
10
10
22
15
15
16
18
16
19
297
1,103
1,400
82
2,848
17
4,347
5
9
–
40
857
911
5,258
(1)
–
(575)
–
(576)
(417)
(1)
(262)
–
–
(680)
(1,256)
4,002
719
784
43
32
2,462
16
(54)
4,002
334
1,082
1,416
33
2,401
5
3,855
–
12
–
–
735
747
4,602
(2)
(10)
(815)
–
(827)
(319)
(11)
–
–
(1)
(331)
(1,158)
3,444
719
784
43
31
1,895
51
(79)
3,444
242
1,166
1,408
8
2,134
4
3,554
–
13
2
–
604
619
4,173
(2)
(16)
(849)
(6)
(873)
(300)
(10)
–
(4)
–
(314)
(1,187)
2,986
718
782
43
19
1,431
82
(89)
2,986
98
3i Group Annual report and accounts 2016
Financial statements
Company statement of changes in equity
for the year to 31 March
2016
Total equity at the start of the year
Profit for the year
Total comprehensive income for the year
Share-based payments
Release on forfeiture of share options
Exercise of share awards
Ordinary dividends
Additional dividends
Total equity at the end of the year
2015 (restated)1
Total equity at the start of the year1
Profit for the year1
Total comprehensive income for the year
Share-based payments
Release on forfeiture of share options
Exercise of share awards1
Ordinary dividends
Additional dividends
Issue of ordinary shares
Total equity at the end of the year
Share
capital
£m
719
–
Share
premium
£m
Capital
redemption
reserve
£m
784
–
43
–
Share-
based
payment
reserve
£m
31
–
15
(14)
719
784
43
32
Share
capital
£m
718
–
Share
premium
£m
Capital
redemption
reserve
£m
782
–
43
–
Share-
based
payment
reserve
£m
19
–
19
(7)
Capital
reserve
£m
1,895
705
705
(25)
(113)
2,462
Capital
reserve
£m
1,431
580
580
(10)
(106)
Revenue
reserve
£m
Treasury
shares
£m
51
28
28
14
(77)
16
(79)
–
25
(54)
Revenue
reserve
£m
82
39
39
7
(77)
Treasury
shares
£m
(89)
–
10
1
719
2
784
43
31
1,895
51
(79)
Total
equity
£m
3,444
733
733
15
–
–
(77)
(113)
4,002
Total
equity
£m
2,986
619
619
19
–
–
(77)
(106)
3
3,444
1 In accordance with the restatement detailed in Note 31, the capital reserve at 1 April 2014 has been restated from £1,368 million to £1,431 million, the revenue
reserve has been restated from £85 million to £82 million and treasury shares has been restated from nil to £(89) million. We have restated capital reserve
profit for the year from £138 million to £580 million, revenue reserve profit for the year from £75 million to £39 million and the exercise of share awards from nil
to £10 million.
Company cash flow statement
for the year to 31 March
3i Group Annual report and accounts 2016
99
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
2016
£m
2015
(restated)1
£m
Cash flow from operating activities
Purchase of investments
Proceeds from investments
Distributions from subsidiaries
Drawdowns by subsidiaries
Net cash flow from derivatives
Portfolio interest received
Portfolio dividends received
Portfolio fees paid
Carried interest and performance fees received
Carried interest and performance fees paid
Acquisition related earn-out charges paid
Operating expenses
Income taxes (paid)/received
Net cash flow from operating activities
Cash flow from financing activities
Dividend paid
Issue of shares
Repurchase of B shares
Interest received
Interest paid
Net cash flow from financing activities
Cash flow from investing activities
Net cash flow from deposits
Net cash flow from investing activities
Change in cash and cash equivalents
Cash and cash equivalents at the start of year
Effect of exchange rate fluctuations
Cash and cash equivalents at the end of year
1 Restated. See Note 31 of the financial statements.
(37)
232
530
(332)
(14)
3
35
(1)
1
–
(22)
–
(1)
394
(190)
–
–
3
(51)
(238)
(40)
(40)
116
735
6
857
(28)
236
635
(503)
9
11
29
(1)
2
(11)
–
–
1
380
(183)
3
(6)
3
(54)
(237)
–
–
143
604
(12)
735
100
3i Group Annual report and accounts 2016
Financial statements
Significant accounting policies
Reporting entity
3i Group plc (the “Company”) is a public limited company incorporated and domiciled in England and Wales. The Consolidated
financial statements (“the Group accounts”) for the year to 31 March 2016 comprise the financial statements of the Company and
its consolidated subsidiaries (collectively, “the Group”).
The Group accounts have been prepared and approved by the Directors in accordance with section 395 of the Companies Act 2006
and the Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008. The Company has taken
advantage of the exemption in section 408 of the Companies Act 2006 not to present its Company statement of comprehensive
income and related Notes.
A number of key accounting policies are disclosed below, but where possible, accounting policies have been shown as part of the Note
to which they specifically relate in order to assist the reader’s understanding.
A Compliance with International Financial Reporting Standards (“IFRS”)
The Group and Company accounts have been prepared and approved by the Directors in accordance with all relevant IFRSs as issued
by the International Accounting Standards Board (“IASB”), and interpretations issued by the IFRS Interpretations Committee, endorsed
by the European Union (“EU”).
The following standards, amendments and interpretations have been issued with implementation dates, subject to EU endorsement
in some cases, which do not impact on these financial statements:
Effective for annual periods beginning on or after
IFRS
IAS 7
IFRS 9
IFRS 15
IFRS 16
Annual improvements 2012 to 2014
Disclosure initiative (amendments to IAS 7 – Statement of Cash Flows)
Financial instruments
Revenue from contracts with customers
Leases
1 January 2016
1 January 2017
1 January 2018
1 January 2018
1 January 2019
The impact of future standards and amendments on the financial statements is being assessed by the Group and the Company.
B Basis of preparation
The financial statements are prepared on a going concern basis as disclosed in the Directors’ report.
C Basis of consolidation
(i) Subsidiaries
Subsidiaries are entities controlled by the Group. Control, as defined by IFRS 10, is achieved when the Group is exposed, or has rights,
to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.
Subsidiaries are fully consolidated from the date on which the Group effectively obtains control. They are de-consolidated from the
date that control ceases.
3i Group plc is an investment entity and, as such, does not consolidate the investment entities it controls. Most of the Group’s interests
in subsidiaries are recognised at fair value through profit or loss. Those subsidiaries which provide investment related services, such as
advisory, management or employment services, are not classified at fair value through profit and loss and continue to be consolidated
unless they are deemed investment entities, in which case they are fair valued.
The acquisition method of accounting is used to account for the acquisition of subsidiaries. Under the acquisition method of
accounting, with some limited exceptions, the assets, liabilities and contingent liabilities of a subsidiary are measured at their fair values
at the date of acquisition. Any non-controlling interest is measured either at fair value or at the non-controlling interest’s proportion
of the net assets acquired. Acquisition related costs are accounted for as expenses when incurred. Any excess of the cost of
acquisition over net assets is capitalised as goodwill. All intra-group balances, transactions, income and expenses are eliminated
upon consolidation.
(ii) Associates
Associates are those entities in which the Group has significant influence, but not control, over the financial and operating policies.
Investments that are held as part of the Group’s investment portfolio are carried in the statement of financial position at fair value even
though the Group may have significant influence over those companies.
(iii) Composition of the Group
The Group comprises several different types of subsidiaries. The Group re-assesses the function performed by each type of subsidiary
to determine its treatment under the IFRS 10 exception from consolidation on an annual basis. The types of subsidiaries and their
treatment under IFRS 10 are as follows:
3i Group Annual report and accounts 2016
101
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
General Partners (GPs) – Consolidated
General Partners provide investment management services and do not hold any direct investments in portfolio assets. These entities
are not investment entities.
Investment managers/advisers – Consolidated
These entities provide investment related services through the provision of investment management or advice. They do not hold any
direct investments in portfolio assets. These entities are not investment entities.
Investment managers/advisers which also hold investments – Consolidated
These entities provide investment related services through the provision of investment management or advice and also hold
investments in managed assets, typically due to regulatory reasons or investor expectations. The primary purpose of these entities is to
provide investment related services and therefore they are not classified as investment entities.
Holding companies of investment managers/advisers – Consolidated
These entities provide investment related services through their subsidiaries. They do not hold any direct investment in portfolio assets
and these entities are not investment entities.
Limited Partnerships and other intermediate investment holding structures – Fair valued
The Group makes investments in portfolio assets through its ultimate parent company as well as through other limited partnerships
and corporate subsidiaries which the Group has created to align the interests of the investment teams with the performance of the
assets through the use of various carried interest schemes. The purpose of these limited partnerships and corporate holding vehicles,
many of which also provide investment related services, is to invest for investment income and capital appreciation. These partnerships
meet the definition of an investment entity and are classified at fair value through profit and loss.
Portfolio investments – Fair valued
Under IFRS 10, the test for accounting subsidiaries has been altered to take wider factors of control as well as actual equity ownership
into account. At 31 March 2016, the Group had 26 investments which were classified as accounting subsidiaries. In accordance with the
investment entity exception, these entities have been held at fair value with movements in fair value being recognised in the
Consolidated statement of comprehensive income. With one exception (Palace Street I Limited) none of these subsidiaries are UK
Companies Act subsidiaries.
Structured entities – Fair valued
The Group has interests in a number of unconsolidated structured entities, their current carrying value and a description of their
activities is included in Note 29.
D Critical accounting estimates and judgements
The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation
of its financial statements. UK company law and IFRS require the Directors, in preparing the Group’s financial statements, to select
suitable accounting policies, apply them consistently and make judgements and estimates that are reasonable and prudent. The
Group’s estimates and assumptions are based on historical experience and expectation of future events and are reviewed periodically.
The actual outcome may be materially different from that anticipated.
The judgements, assumptions and estimates involved in the Group’s accounting policies that are considered by the Board to be the
most important to the portrayal of its financial condition are the fair valuation of the investment and the assessment regarding
investment entities. The investment portfolio is held at fair value. Given the importance of this area, the Board has a separate Valuations
Committee to review the valuations policies, process and application to individual investments. A report on the activities of the
Valuations Committee is included in the Governance section of the Annual report. Note 12 provides further detail on the fair value
of the investment portfolio, including sensitivities to inputs in level 3 valuations. The Group’s valuation policy is set out on pages 148
and 149.
Further detail on the assessment as an investment entity is as follows:
(a) Assessment as an investment entity
Entities that meet the definition of an investment entity within IFRS 10 are required to account for most investments in controlled
entities, as well as investments in associates and joint ventures, at fair value through profit and loss.
The Board has concluded that the Company continues to meet the definition of an investment entity as its strategic objective of
investing in portfolio investments and providing investment management services to investors for the purpose of generating returns
in the form of investment income and capital appreciation remains unchanged.
The Group is required to determine the degree of control or influence the Group exercises and the form of any control to ensure that
the financial treatment is accurate. Further detail on our review of our application of IFRS 10 can be found on pages 48 to 52.
102
3i Group Annual report and accounts 2016
Financial statements
Significant accounting policies
(b) Valuation of the defined benefit schemes
The Group also considers the valuation of the defined benefit schemes in accordance with IAS 19 to be a significant estimate. The
Group reviews its assumptions annually with its independent actuaries.
E Other accounting policies
(a) Revenue recognition
Gross investment return is equivalent to “revenue” for the purposes of IAS 1. It represents the overall increase in net assets from the
investment portfolio net of deal-related costs and includes foreign exchange movements in respect of the investment portfolio.
Investment income is analysed into the following components:
i. Realised profits or losses over value on the disposal of investments are the difference between the fair value of the consideration
received less any directly attributable costs, on the sale of equity and the repayment of loans and receivables, and its carrying value
at the start of the accounting period, converted into sterling using the exchange rates in force at the date of disposal.
ii. Unrealised profits or losses on the revaluation of investments are the movement in the carrying value of investments between
the start and end of the accounting period converted into sterling using the exchange rates in force at the date of the movement.
iii. Fair value movements on investment entity subsidiaries are the movements in the carrying value of Group subsidiaries which
are classified as investment entities under IFRS 10. The Group makes investments in portfolio assets through these entities which
are usually limited partnerships or corporate subsidiaries.
iv. Portfolio income is that portion of income that is directly related to the return from individual investments. It is recognised to the
extent that it is probable that there will be economic benefit and the income can be reliably measured. The following specific
recognition criteria must be met before the income is recognised:
– Dividends from equity investments are recognised in the Consolidated statement of comprehensive income when the
shareholders’ rights to receive payment have been established. Income received on the investment in the most junior ranked level
of CLO capital is recognised as a dividend. £31 million was received in the year (2015: £16 million).
– Income from loans and receivables is recognised as it accrues by reference to the principal outstanding and the effective interest
rate applicable, which is the rate that exactly discounts the estimated future cash flows through the expected life of the financial
asset to the asset’s carrying value. When the fair value of an investment is assessed to be below the principal value of a loan the
Group recognises a provision against any interest accrued from the date of the assessment going forward until the investment
is assessed to have recovered in value. Income received on the instruments in the most junior level of CLO capital is recognised
as a dividend as detailed above. £31 million was received in the year (2015: £16 million).
– Fee income is earned directly from investee companies when an investment is first made and through the life of the investment.
Fees that are earned on a financing arrangement are considered to relate to a financial asset measured at fair value through profit
or loss and are recognised when that investment is made. Fees that are earned on the basis of providing an ongoing service
to the investee company are recognised as that service is provided.
v. Foreign exchange on investments arises on investments made in currencies that are different from the functional currency of the
Group entity. Investments are translated at the exchange rate ruling at the date of the transaction. At each subsequent reporting
date investments are translated to sterling at the exchange rate ruling at that date.
(b) Foreign currency translation
For the Company and those subsidiaries whose balance sheets are denominated in sterling, which is the Company’s functional and
presentational currency, monetary assets and liabilities denominated in foreign currencies are translated into sterling at the closing
rates of exchange at the balance sheet date. Foreign currency transactions are translated into sterling at the average rates of exchange
over the year and exchange differences arising are taken to the Consolidated statement of comprehensive income.
The balance sheets of subsidiaries and associates denominated in foreign currencies are translated into sterling at the closing rates.
The Statements of comprehensive income for these subsidiaries and associates are translated at the average rates and exchange
differences arising are taken to other comprehensive income. Such exchange differences are reclassified to the Consolidated
statement of comprehensive income in the period in which the subsidiary or associate is disposed of.
Exchange movements in relation to forward foreign exchange contracts are included within exchange movements in the Consolidated
statement of comprehensive income. During the year, a £14 million loss (2015: £12 million gain) was recognised in exchange movements
in relation to forward foreign exchange contracts.
(c) Treasury assets and liabilities
Short-term treasury assets and short and long-term treasury liabilities are used in order to manage cash flows and minimise the overall
costs of borrowing.
Cash and cash equivalents comprise cash at bank, short-term deposits and amounts held in money market funds, which are readily
convertible into cash and there is an insignificant risk of changes in value. Financial assets and liabilities are recognised in the balance
sheet when the relevant Group entity becomes a party to the contractual provisions of the instrument. De-recognition occurs when
rights to cash flows from a financial asset expire, or when a liability is extinguished.
Notes to the accounts
3i Group Annual report and accounts 2016
103
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
1 Segmental analysis
Operating segments are the components of the Group whose results are regularly reviewed by the Group’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its performance.
The Chief Executive, who is considered to be the chief operating decision maker, managed the Group on two bases throughout the
year. Firstly, as business divisions determined with reference to market focus, geographic focus, investment funding model and the
Group’s management hierarchy. Secondly, he considers separate Proprietary Capital and Fund Management businesses focused on
investment returns and Fund Management profits respectively. A description of the activities, including products and services offered
by these divisions and the allocation of resources, is given in the Strategic report. For the geographical segmental split, revenue
information is based on the locations of the assets held.
The segmental information that follows is presented on the Investment basis which is the basis used by the Chief Executive to monitor
the performance of the Group. The remaining Notes are prepared on the IFRS basis.
Year to 31 March 2016
Realised profits over value on the disposal
of investments
Unrealised profits/(losses) on the revaluation
of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable/(payable)
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Synthetic fees
Operating expenses1
Interest receivable
Interest payable
Exchange movements
Operating profit before carry
Carried interest
Carried interest and performance
fees receivable
Carried interest and performance fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Other comprehensive income
Re-measurements of defined benefit plans
Total return
Net divestment/(investment)
Realisations2
Cash investment3
Balance sheet
Opening portfolio value at 1 April 2015
Investment4
Value disposed
Unrealised value movement
Other movement5
Closing portfolio value at 31 March 2016
Private
Equity
£m
Infrastructure
£m
Debt
Management
£m
Total
£m
Proprietary
Capital
£m
Fund
Management
£m
–
–
–
–
–
–
–
79
44
(103)
–
–
–
20
69
690
18
59
7
168
1,011
13
–
(66)
58
(171)
–
743
(365)
378
3,148
464
(674)
690
113
3,741
3
22
21
–
–
1
47
28
–
(29)
20
(15)
–
51
–
51
553
–
(48)
22
–
527
–
72
(43)
669
32
4
(1)
19
11
38
–
(39)
5
(2)
(5)
2
(88)
(86)
176
88
(2)
(43)
10
229
71
63
6
188
1,069
79
–
(134)
4
(47)
(31)
940
83
(188)
(5)
830
–
(6)
824
796
(453)
343
3,877
552
(724)
669
123
4,497
72
669
71
63
6
188
1,069
–
(44)
(31)
4
(47)
(31)
920
796
(453)
343
3,877
552
(724)
669
123
4,497
Total
£m
72
669
71
63
6
188
1,069
79
–
(134)
4
(47)
(31)
940
83
(188)
(5)
830
–
(6)
824
796
(453)
343
3,877
552
(724)
669
123
4,497
1 Includes restructuring costs of £5 million, nil and nil for Private Equity, Infrastructure and Debt Management, respectively, and nil and £5 million for
Proprietary Capital and Fund Management, respectively.
2 £25 million in Private Equity relates to proceeds held back in the holding company of the investee company.
3 Includes £4 million of Debt Management investment awaiting settlement at 31 March 2016.
4 Includes capitalised interest and other non-cash investment.
5 Other relates to foreign exchange and the provisioning of capitalised interest. In Debt Management, £9 million relates to capital withdrawn from the
Palace Street I portfolio.
104
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
1 Segmental analysis continued
Year to 31 March 2015
Realised profits over value on the disposal
of investments
Unrealised profits/(losses) on the revaluation
of investments
Portfolio income
Dividends
Income from loans and receivables
Fees receivable/(payable)
Foreign exchange on investments
Gross investment return
Fees receivable from external funds
Synthetic fees
Operating expenses1
Interest receivable
Interest payable
Movement in the fair value of derivatives
Exchange movements
Operating profit before carry
Carried interest
Carried interest and performance
fees receivable
Carried interest and performance
fees payable
Acquisition related earn-out charges
Operating profit
Income taxes
Other comprehensive income
Re-measurements of defined benefit plans
Total return
Net divestment/(investment)
Realisations
Cash investment
Balance sheet
Opening portfolio value at 1 April 2014
Investment2
Value disposed
Unrealised value movement
Other movement3
Closing portfolio value at 31 March 2015
Private
Equity
£m
Infrastructure
£m
Debt
Management
£m
Total
£m
Proprietary
Capital
£m
Fund
Management
£m
Total
£m
161
641
9
56
8
(156)
719
16
–
(66)
28
(103)
–
831
(369)
462
2,935
509
(670)
641
(267)
3,148
1
68
20
–
(1)
8
96
30
–
(31)
45
(35)
–
10
–
10
487
–
(9)
68
7
553
–
(25)
16
6
(1)
(6)
(10)
34
–
(34)
7
(4)
(8)
–
(105)
(105)
143
105
–
(25)
(47)
176
162
684
45
62
6
(154)
805
80
–
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
(14)
659
841
(474)
367
3,565
614
(679)
684
(307)
3,877
162
684
45
62
6
(154)
805
–
(45)
(32)
3
(49)
(1)
40
721
841
(474)
367
3,565
614
(679)
684
(307)
3,877
–
–
–
–
–
–
–
80
45
(99)
–
–
–
–
26
162
684
45
62
6
(154)
805
80
–
(131)
3
(49)
(1)
40
747
80
(142)
(8)
677
(4)
(14)
659
841
(474)
367
3,565
614
(679)
684
(307)
3,877
1 Includes restructuring costs of nil, nil and £1 million for Private Equity, Infrastructure and Debt Management, respectively, and nil and £1 million for
Proprietary Capital and Fund Management, respectively.
2 Includes capitalised interest and other non-cash investment.
3 Other relates to foreign exchange and the provisioning of capitalised interest. In Debt Management, £41 million relates to capital withdrawn from the
Palace Street I portfolio.
1 Segmental analysis continued
Year to 31 March 2016
Gross investment return
Realised profits over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Foreign exchange on investments
Net divestment/(investment)
Realisations
Cash Investment
Balance sheet
Closing portfolio value at 31 March 2016
Year to 31 March 2015
Gross investment return
Realised profits over value on the disposal of investments
Unrealised profits/(losses) on the revaluation of investments
Portfolio income
Foreign exchange on investments
Net divestment/(investment)
Realisations
Cash Investment
3i Group Annual report and accounts 2016
105
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
UK
£m
8
11
59
2
80
62
(121)
(59)
Northern
Europe
£m
North
America
£m
Rest of
World
£m
49
707
66
175
997
586
(272)
314
4
(50)
12
11
(23)
96
(60)
36
11
1
3
–
15
52
–
52
Total
£m
72
669
140
188
1,069
796
(453)
343
1,240
2,498
385
374
4,497
Northern
Europe
£m
North
America
£m
Rest of
World
£m
UK
£m
2
106
56
(2)
162
70
(109)
(39)
117
526
41
(208)
476
518
(186)
332
29
39
13
47
128
161
(179)
(18)
457
Total
£m
162
684
113
(154)
805
841
(474)
367
14
13
3
9
39
92
–
92
413
3,877
Balance sheet
Closing portfolio value at 31 March 2015
1,148
1,859
2 Realised profits over value on the disposal of investments
Realisations
Valuation of disposed investments
Of which:
– profits recognised on realisations
– losses recognised on realisations
Realisations
Valuation of disposed investments
Of which:
– profits recognised on realisations
– losses recognised on realisations
2016
Unquoted
investments
£m
2016
Quoted
investments
£m
176
(166)
10
12
(2)
10
60
(59)
1
2
(1)
1
2015
Unquoted
investments
£m
2015
Quoted
investments
£m
155
(136)
19
21
(2)
19
115
(80)
35
35
–
35
2016
Total
£m
236
(225)
11
14
(3)
11
2015
Total
£m
270
(216)
54
56
(2)
54
106
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
3 Unrealised profits on the revaluation of investments
Movement in the fair value of investments
Of which:
– unrealised gains
– unrealised losses
Movement in the fair value of investments
Of which:
– unrealised gains
– unrealised losses
2016
Unquoted
investments
£m
2016
Quoted
investments
£m
72
155
(83)
72
20
20
–
20
2015
Unquoted
investments
£m
2015
Quoted
investments
£m
117
193
(76)
117
119
119
–
119
4 Operating expenses
Operating expenses of £132 million (2015: £122 million) recognised in the IFRS Consolidated statement of comprehensive income
include the following amounts:
Depreciation of property, plant and equipment
Amortisation of fund management contracts
Audit fees
Staff costs (Note 5)
Restructuring and redundancy costs
2016
£m
1
7
2
83
5
Expenses incurred in the entities accounted for as investment entity subsidiaries were £2 million (2015: £9 million). Total operating
expenses were £134 million (2015: £131 million) under the Investment basis.
5 Staff costs
The table below is prepared in accordance with Companies Act requirements, which is consistent with both the IFRS and the
Investment basis.
Wages and salaries
Social security costs
Share-based payment costs (Note 27)
Pension costs
2016
£m
61
10
8
4
83
Under both IFRS and the Investment basis, the average number of employees during the year was 276 (2015: 271).
Wages and salaries shown above include salaries paid in the year, bonuses and portfolio incentive schemes relating to the year.
These costs are included in operating expenses. The table below analyses these costs between fixed and variable elements.
Fixed staff costs
Variable staff costs
More detail on this information is included in the Directors’ remuneration report on page 82.
2016
£m
41
42
83
2016
Total
£m
92
175
(83)
92
2015
Total
£m
236
312
(76)
236
2015
£m
2
6
2
85
1
2015
£m
56
11
15
3
85
2015
£m
39
46
85
3i Group Annual report and accounts 2016
107
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
6 Information regarding the Group’s auditors
During the year the Group obtained the following services from its Auditor, Ernst & Young LLP. The table below is prepared in
accordance with Companies Act requirements, which is consistent with both the IFRS and the Investment basis.
Audit services
Statutory audit
– Company
– UK subsidiaries
– Overseas subsidiaries
Non-audit services
Other assurance services
Investment due diligence
Tax services (compliance and advisory services)
2016
£m
2015
£m
1.2
0.5
0.3
2.0
0.1
1.3
0.1
3.5
1.2
0.6
0.2
2.0
0.5
0.2
0.3
3.0
Non-audit services
In addition to the above, Ernst & Young LLP has received fees from investee companies. It is estimated that Ernst & Young LLP received
less than 20% (2015: less than 20%) of the total investment-related fees paid to the four largest accounting firms.
7 Income taxes
Accounting policy:
Income taxes represent the sum of the tax currently payable, withholding taxes suffered and deferred tax. Tax is charged or credited
in the Statement of comprehensive income, except where it relates to items charged or credited directly to equity, in which case the
tax is also dealt with in equity.
The tax currently payable is based on the taxable profit for the year. This may differ from the profit included in the Statement of
comprehensive income because it excludes items of income or expense that are taxable or deductible in other years and it further
excludes items that are never taxable or deductible.
To enable the tax charge to be based on the profit for the year, deferred tax is provided in full on temporary timing differences, at
the rates of tax expected to apply when these differences crystallise. Deferred tax assets are recognised only to the extent that it is
probable that sufficient taxable profits will be available against which temporary differences can be set off. All deferred tax liabilities
are offset against deferred tax assets in accordance with the provisions of IAS 12.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
The main rate of UK corporation tax is to be reduced from 20% to 19% from 1 April 2017, and further to 18% from 1 April 2020.
These changes will affect future UK corporate taxes payable and the rate at which deferred tax assets are expected to reverse.
Current taxes
Current year
Deferred taxes
Deferred income taxes
Total income tax charge in the Consolidated statement of comprehensive income
2016
£m
2015
£m
3
(1)
2
3
(1)
2
108
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
7 Income taxes continued
Reconciliation of income taxes in the Consolidated statement of comprehensive income
The tax charge for the year is different to the standard rate of corporation tax in the UK, currently 20% (2015: 21%), and the differences
are explained below:
Profit before tax
Profit before tax multiplied by rate of corporation tax in the UK of 20% (2015: 21%)
Effects of:
Non-taxable capital profits due to UK approved investment trust company status
Other differences between accounting and tax profits:
Non-taxable dividend income
Permanent differences – non-deductible items
Timing differences – deferred tax charges/(credits)
Overseas countries taxes
Excess unutilised tax losses arising in the period
Total income tax charge in the Consolidated statement of comprehensive income
2016
£m
819
164
(163)
1
(5)
4
2
2
(2)
2
2015
£m
702
147
(145)
2
(6)
6
(3)
2
1
2
The affairs of the Group’s parent company are directed so as to allow it to meet the requisite conditions to continue to operate as an
approved investment trust company for UK tax purposes. Approved investment trust companies are used as investment fund vehicles.
The tax exemption for capital profits which they benefit from allows them to ensure that investors do not ultimately suffer double
taxation of their investment returns, ie once at the level of the investment fund vehicle and then again in the hands of the investors.
Including £2 million of tax credits (2015: £2 million tax charge) incurred in fair valued entities, the total tax charge for the Group was nil
(2015: £4 million) under the Investment basis.
Deferred income taxes
Opening deferred income tax asset
Tax losses
Income in accounts taxable in the future
Other
Recognised through Statement of comprehensive income
Tax losses utilised
Income in accounts taxable in the future
Other
Closing deferred income tax asset
Tax losses
Income in accounts taxable in the future
Other
2016
£m
2015
£m
7
(7)
2
2
–
–
1
1
7
(7)
3
3
12
(12)
1
1
(5)
5
1
1
7
(7)
2
2
At 31 March 2016, the Group had carried forward tax losses of £1,375 million (2015: £1,409 million), capital losses of £88 million
(2015: £98 million) and other temporary differences of £69 million (2015: £12 million). It is uncertain that the Group will generate sufficient
taxable profits in the foreseeable future to utilise these amounts and therefore no deferred tax asset has been recognised in respect
of these losses. Deferred income taxes are calculated using an expected rate of corporation tax in the UK of 19% (2015: 20%).
3i Group Annual report and accounts 2016
109
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
8 Per share information
The calculation of basic earnings per share is based on the profit attributable to shareholders and the number of basic average shares.
When calculating the diluted earnings per share, the weighted average number of shares in issue is adjusted for the effect of all dilutive
share options and awards.
As at 31 March
Earnings per share (pence)
Basic
Diluted
Earnings (£m)
Profit for the year attributable to equity holders of the Company
As at 31 March
Weighted average number of shares in issue
Ordinary shares
Own shares
Effect of dilutive potential ordinary shares
Share options and awards
Diluted shares
As at 31 March
Net assets per share (£)
Basic
Diluted
Net assets (£m)
Net assets attributable to equity holders of the Company
2016
2015
85.6
85.2
817
73.9
72.9
700
2016
2015
972,569,633
(18,427,460)
954,142,173
972,141,887
(24,825,193)
947,316,694
4,735,616
958,877,789
12,293,543
959,610,237
2016
2015
4.66
4.63
4.01
3.96
4,455
3,806
Basic NAV per share is calculated on 956,417,466 shares in issue at 31 March 2016 (2015: 948,610,924). Diluted NAV per share is calculated
on diluted shares of 961,323,047 at 31 March 2016 (2015: 961,432,940).
9 Dividends
Declared and paid during the year
Ordinary shares
Final dividend
Interim dividend
Proposed final dividend
2016
pence
per share
2016
£m
2015
pence
per share
14.0
6.0
20.0
16.0
133
57
190
153
13.3
6.0
19.3
14.0
2015
£m
126
57
183
133
In FY2016, the Group’s dividend policy is to distribute to shareholders between 15% and 20% of gross cash realisation proceeds,
provided that gearing is less than 20% and gross debt is, or is scheduled to be below £1 billion. The policy is designed to give
shareholders a direct share in the Group’s realisation activities, while retaining sufficient funds within the Group to make new
investments, meet liabilities as they fall due and meet internally set liquidity requirements. When determining the level of realisations
to be paid as a dividend each year, the Board considers current and expected cash investment along with any significant actual or
expected cash flows.
The distribution policy covers the Group’s total annual dividend, which is split between a base dividend (8.1 pence per share) and an
additional dividend (2016: 13.9 pence per share). The dividend can be paid out of either the capital reserve or the revenue reserve
subject to the investment trust rules which state that at least 85% of revenue must be distributed by the Company.
110
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
10 Investment portfolio
Accounting policy:
Investments are recognised and de-recognised on the date when their purchase or sale is subject to a relevant contract and the
associated risks and rewards have been transferred. The Group manages its investments with a view to profiting from the receipt
of investment income and capital appreciation from changes in the fair value of investments.
All investments are initially recognised at the fair value of the consideration given and are subsequently measured at fair value,
in accordance with 3i Group’s valuation policies.
Quoted investments are designated at fair value through profit and loss and subsequently carried in the balance sheet at fair value.
Fair value is measured using the closing bid price at the reporting date, where the investment is quoted on an active stock market.
Unquoted investments, including both equity and loans are designated at fair value through profit and loss and are subsequently
carried in the Consolidated statement of financial position at fair value. Fair value is determined in line with 3i’s valuation policy,
which is compliant with the fair value guidelines under IFRS and the International Private Equity and Venture Capital (IPEV) Valuation
Guidelines, details of which are available in “Portfolio valuation – an explanation” on pages 148 and 149.
Interest bearing loans accrue interest which is either settled in cash or capitalised on a regular basis and included as part of the
principal loan balance. The capitalisation of accrued interest is treated as part of investment additions during the year. If the fair
value of an investment is assessed to be below the principal value of the loan the Group recognises a fair value reduction against any
interest income accrued from the date of the assessment going forward. “Capitalisation at nil value” is the term used to describe the
capitalisation of accrued interest which has been fully provided for. These transactions are disclosed as additions to portfolio cost
with an equal reduction made where loan notes have nil value.
In accordance with IFRS 10, the proportion of the investment portfolio held by the Group’s unconsolidated subsidiaries is presented as
part of the fair value of investment entity subsidiaries, along with the fair value of their other assets and liabilities. A reconciliation of the
fair value of Investments in investment entities is included in Note 11.
Opening book value
Additions
– of which loan notes with nil value
Disposals, repayments and write-offs
Fair value movement1
Other movements and net cash returned
Closing book value
Quoted investments
Unquoted investments
Closing book value
Group
2016
£m
1,671
164
(13)
(225)
92
(149)
1,540
297
1,243
1,540
Group
2015
£m
Company
2016
£m
Company
2015
(restated)
£m
1,582
203
(48)
(216)
236
(86)
1,671
399
1,272
1,671
1,416
95
(13)
(224)
119
7
1,400
297
1,103
1,400
1,408
109
(48)
(197)
208
(64)
1,416
334
1,082
1,416
1 All fair value movements relate to assets held at the end of the period.
The holding period of 3i’s investment portfolio is on average greater than one year. For this reason the portfolio is classified as non-
current. It is not possible to identify with certainty investments that will be sold within one year.
Additions include £35 million (2015: £69 million) in interest received by way of loan notes, of which £13 million (2015: £48 million) has
been valued to nil, as well as cash advanced to Debt Management warehouses. Included within the Consolidated statement of
comprehensive income is £26 million (2015: £38 million) of interest income, which reflects the net additions after write downs noted
above, £5 million (2015: £14 million) of cash income and the capitalisation of accrued income and non-capitalised accrued income is £(1)
million (2015: £3 million).
Other movements include the effects of foreign exchange and conversions from one instrument into another, including £38 million
which relates to cash returned (2015: £18 million cash returned) from Debt Management warehouses.
3i Group Annual report and accounts 2016
111
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
11 Investments in investment entity subsidiaries
Accounting policy:
Investments in investment entity subsidiaries are accounted for as financial instruments at fair value through profit and loss.
These entities are typically limited partnerships and other intermediate investment holding structures which hold the Group’s
interests in investments in portfolio companies (Investment Entity Holding Companies). The fair value can increase or reduce from
either cash flows to/from the investment entities or valuation movements in line with the Group’s valuation policy.
Substantially all of these entities meet the definition of a Fund under the IPEV guidelines and the fair value and unit of account of
these entities is their net asset values. There were no adjustments to the subsidiaries’ net asset values in the year. In 2015 an
adjustment of £142 million was made to reflect the carried interest payable attributable to the value of investments held by the
entities but not accounted for within their net asset value. This adjustment is no longer required as the underlying entities, being
qualifying limited partnerships, have now adopted IFRS and account for the relevant carried interest payable within their net asset
value. Carried interest is described further in Note 13.
We determine that in the ordinary course of business, the net asset values of an investment entity subsidiary are considered to be
the most appropriate to determine fair value. At each reporting period, we consider whether any additional fair value adjustments
need to be made to the net asset values of the investment entity subsidiaries. These adjustments may be required to reflect market
participants’ considerations about fair value that may include, but are not limited to, liquidity and the portfolio effect of holding
multiple investments within the investment entity subsidiary. There was no particular circumstance to indicate that a fair value
adjustment was required and after due consideration we concluded that the net asset values were the most appropriate reflection of
fair value at 31 March 2016.
Non-current
Opening book value
Net cash flow from investment entities
Fair value movements on investment entity subsidiaries
Transfer of assets to/(from) investment entity subsidiaries
Closing book value
Group
2016
£m
2,079
(206)
591
216
2,680
Group
2015
£m
1,909
(272)
530
(88)
2,079
All investment entities are classified as Level 3 in the fair value hierarchy, see Note 12 for details.
A 5% movement in the closing book value of investments in investment entities would have an impact of £134 million
(2015: £104 million).
Restrictions
3i Group plc, the ultimate parent company, receives dividend income from its subsidiaries. There are no significant restrictions on the
ability to transfer funds from these subsidiaries to the Group.
Support
3i Group plc continues to provide, where necessary, ongoing support to its investment entity subsidiaries for the purchase of portfolio
investments. During the year, there were net cash flows to the Group as noted in the table above. The Group’s current commitments to
its subsidiaries are disclosed in Note 24.
112
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
12 Fair values of assets and liabilities
Accounting policy:
Financial instruments, other than those held at amortised cost, are held at fair value and are designated irrevocably at inception.
In particular, 3i designates groups of financial instruments as being at fair value when they are managed, and their performance
evaluated, on a fair value basis in accordance with a documented risk management or investment strategy, and where information
about the groups of financial instruments is reported to management on that basis.
(A) Classification
The following tables analyse the Group’s assets and liabilities in accordance with the categories of financial instruments in IAS 39:
At 31 March
Assets
Quoted investments
Unquoted investments
Investments in investment entities
Other financial assets
Total
Liabilities
Loans and borrowings
Other financial liabilities
Total
At 31 March
Assets
Quoted investments
Unquoted investments
Other financial assets
Total
Liabilities
Loans and borrowings
Other financial liabilities
Total
Group
2016
Designated
at fair value
through
profit and
loss
£m
Group
2016
Other
financial
instruments
at amortised
cost
£m
297
1,243
2,680
117
4,337
–
105
105
–
–
–
68
68
837
127
964
Company
2016
Designated
at fair value
through
profit and
loss
£m
Company
2016
Other
financial
instruments
at amortised
cost
£m
297
1,103
87
1,487
–
1
1
–
–
26
26
837
418
1,255
Group
2015
Designated
at fair value
through
profit and
loss
£m
Group
2015
Other
financial
instruments
at amortised
cost
£m
399
1,272
2,079
88
3,838
–
85
85
–
–
–
54
54
815
179
994
Company
2015
Designated
at fair value
through
profit and
loss
(restated)
£m
Company
2015
Other
financial
instruments
at amortised
cost
(restated)
£m
334
1,082
33
1,449
–
2
2
–
–
17
17
815
340
1,155
Group
2016
Total
£m
297
1,243
2,680
185
4,405
837
232
1,069
Company
2016
Total
£m
297
1,103
113
1,513
837
419
1,256
Group
2015
Total
£m
399
1,272
2,079
142
3,892
815
264
1,079
Company
2015
Total
(restated)
£m
334
1,082
50
1,466
815
342
1,157
3i enters into warehouse arrangements to support the creation of debt portfolios ahead of future CLO launches and has designated
these financial instruments at fair value. At 31 March 2016, 3i has invested £17 million (2015: £43 million) in to these warehouses and the
balance is included within the Group’s unquoted investments. For the Company, £17 million is included within the unquoted investments.
Details of the commitments and contingent liabilities in relation to these warehouses can be found in Notes 24 and 25.
3i Group Annual report and accounts 2016
113
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
12 Fair values of assets and liabilities continued
(B) Valuation
The fair values of the Group’s financial assets and liabilities are not materially different from their carrying values with the exception of
loans and borrowings. The fair value of the loans and borrowings is £967 million (2015: £997 million), determined with reference to their
published market prices. The carrying value of the loans and borrowings is £837 million (2015: £815 million).
Valuation hierarchy
The Group classifies financial instruments measured at fair value in the investment portfolio according to the following hierarchy:
Level
Level 1
Level 2
Level 3
Fair value input description
Quoted prices (unadjusted) from active markets
Inputs other than quoted prices included in Level 1 that are observable
either directly (ie as prices) or indirectly (ie derived from prices)
Inputs that are not based on observable market data
Financial instruments
Quoted equity instruments
Unquoted equity instruments and loan instruments
Unquoted equity instruments and debt instruments are measured in accordance with the IPEV Guidelines with reference to the most
appropriate information available at the time of measurement. Further information regarding the valuation of unquoted equity
instruments and debt instruments can be found in the section Portfolio valuation – an explanation on pages 148 and 149.
The tables below show the classification of financial instruments held at fair value into the valuation hierarchy at 31 March 2016:
Assets
Quoted investments
Unquoted investments
Total
Group
2016
Level 1
£m
297
–
297
Group
2016
Level 2
£m
–
–
–
Group
2016
Level 3
£m
–
1,243
1,243
Group
2016
Total
£m
297
1,243
1,540
Group
2015
Level 1
£m
399
–
399
Group
2015
Level 2
£m
–
–
–
Group
2015
Level 3
£m
–
1,272
1,272
Group
2015
Total
£m
399
1,272
1,671
At the Company level, the disclosures remain the same, with the exception of unquoted investments. Unquoted investments in the
Company of £1,103 million (2015: £1,082 million) are valued at Level 3 in the fair value hierarchy. This disclosure only refers to the directly
held investment portfolio. The fair value hierarchy also applies to Investments in investment entities, see Note 11 for details.
Investments in investment entities are fair valued at the entity’s net asset value, with the most significant component being the
underlying investment portfolio. The underlying portfolio is valued under the same methodology as directly held investments, with
any other assets or liabilities within investment entities valued in accordance with the Group’s accounting policies. Note 11 details
the Directors’ considerations about the fair value of the underlying Investment entity subsidiaries.
114
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
12 Fair values of assets and liabilities continued
Movements in the directly held investment portfolio categorised as Level 3 during the year:
Opening book value
Additions
– of which loan notes with nil value
Disposals, repayments and write-offs
Fair value movement1
Transfer of investment Level 3 to Level 1
Other movements
Closing book value
Group
2016
£m
1,272
164
(13)
(166)
72
–
(86)
1,243
Group
2015
£m
Company
2016
£m
Company
2015
(restated)
£m
1,324
201
(48)
(136)
117
(112)
(74)
1,272
1,082
95
(13)
(165)
98
–
6
1,103
1,166
107
(48)
(136)
117
(70)
(54)
1,082
1 All fair value movements relate to assets held at the end of the period.
Other movements include the effects of foreign exchange and conversions from one instrument into another, including £38 million
which relates to cash returned (2015: £18 million cash returned) from Debt Management warehouses.
Unquoted investments valued using Level 3 inputs also had the following impact on the Statement of comprehensive income: realised
profits over value on disposal of investment of £10 million (2015: £19 million), dividend income of £46 million (2015: £23 million) and
foreign exchange gains of £40 million (2015: £52 million losses).
Level 3 inputs are sensitive to assumptions made when ascertaining fair value as described in the Portfolio valuation – an explanation
section. On an IFRS basis, of assets held at 31 March 2016, classified as Level 3, 28% (2015: 44%) were valued using a multiple of earnings
and the remaining 72% (2015: 56%) were valued using alternative valuation methodologies.
Valuation multiple – The valuation multiple is the main assumption applied to a multiple of earnings based valuation. The multiple is
derived from comparable listed companies or relevant market transaction multiples. Companies in the same industry and geography
and, where possible, with a similar business model and profile are selected and then adjusted for factors including liquidity risk, growth
potential and relative performance. The value weighted average earnings multiple used when valuing the portfolio was 9.83x
(2015: 9.68x).
If the multiple used to value each unquoted investment valued on an earnings multiple basis as at 31 March 2016 decreased by 5%,
the investment portfolio would decrease by £19 million (2015: £35 million) or 1% (2015: 2%). If the same sensitivity was applied to the
underlying portfolio held by investment entities, this would have a negative impact of £173 million (2015: £121 million) or 6% (2015: 5%).
If the multiple increased by 5% then the investment portfolio would increase by £19 million (2015: £33 million) or 1% (2015: 2%). If the
same sensitivity was applied to the underlying portfolio held by investment entities, this would have a positive impact of £172 million
(2015: £122 million) or 6% (2015: 6%).
Alternative valuation methodologies – There are a number of alternative investment valuation methodologies used by the Group,
for reasons specific to individual assets. The details of such valuation methodologies, and the inputs that are used, are given in the
Portfolio valuation – an explanation section. Each methodology is used for a proportion of assets, by value and at year end the
following techniques were used: 30% DCF (2015: 21%), 11% Imminent sale (2015: 7%), 10% Industry metric (2015: 10%), 18% broker
quotes (2015: 13%) and 3% other (2015: 5%). If the value of all of the investments valued under alternative methodologies moved by
5%, this would have an impact on the investment portfolio of £45 million (2015: £35 million) or 3% (2015: 2%). If the same sensitivity was
applied to the underlying portfolio held by investment entities, this would have an impact of £9 million (2015: £6 million) or 0.3%
(2015: 0.3%).
3i Group Annual report and accounts 2016
115
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
13 Carried interest and performance fees
Accounting policy:
Carried interest and performance fees receivable
The Group earns a share of profits (“carried interest and performance fees receivable”) from funds which it manages on behalf
of third parties. These profits are earned when the funds meet certain performance conditions.
Carried interest and performance fees receivable include amounts receivable from Private Equity, Infrastructure and Debt
Management funds and is measured at fair value. Each scheme is separately reviewed at the balance sheet date, and an accrual for
carried interest receivable is made once the performance conditions would be achieved if the remaining assets in that fund were
realised at fair value. Fair value is determined using the Group’s valuation methodology and is measured at the balance sheet date.
An accrual is made equal to the Group’s share of profits in excess of the performance conditions, taking into account the cash
already returned to fund investors and the fair value of assets remaining in the fund.
The performance fee receivable from 3iN is based on 3iN’s most recently published NAV subject to a performance hurdle and a high
water mark.
Carried interest and performance fees payable
The Group offers investment executives the opportunity to participate in the returns from successful investments. “Carried interest
and performance fees payable” is the term used for amounts payable to executives on investment-related transactions and is
measured at fair value.
A variety of asset pooling arrangements are in place so that executives may have an interest in one or more carried interest plans.
Carried interest payable is accrued if its performance conditions, measured at the balance sheet date, would be achieved if the
remaining assets in that plans were realised at fair value. An accrual is made equal to the executive’s share of profits in excess of the
performance conditions in place in the carried interest plan, discounted to reflect the likely actual cash payment date, which may be
materially later than the time of the accrual.
The Infrastructure performance fee is accrued when the Group becomes contractually liable to make payments to the team.
Under IFRS 10, where carried interest payable reduces the fair value of an investment entity subsidiary, that movement is recorded
through “Fair value movements on investment entity subsidiaries”. At 31 March 2016, an additional £299 million of carried interest
payable was recognised in the Statement of financial position of these investment entity subsidiaries (2015: £142 million). As detailed
in Note 11, the net assets of the Investment Entity subsidiaries were adjusted to reflect £142 million of carry payable in FY2015. No
such adjustment was required in FY2016.
Opening carried interest and performance fees receivable
Carried interest and performance fees receivable recognised in the Consolidated statement of comprehensive income
during the year
Cash received in the year
Other movements
Closing carried interest and performance fees receivable
Of which: receivable in greater than one year
Opening carried interest and performance fees payable
Carried interest and performance fees payable recognised in the Consolidated statement of comprehensive income
during the year1
Cash paid in the year
Other movements
Closing carried interest and performance fees payable
Of which: payable in greater than one year
Group
2016
£m
Group
2015
£m
88
78
(52)
3
117
89
Group
2016
£m
85
31
(13)
2
105
85
17
80
(6)
(3)
88
43
Group
2015
£m
36
68
(14)
(5)
85
72
1 The carry payable charge in the table above does not include £9 million (2015: £4 million) associated with the share-based payment charge arising from
related carry schemes. The total carried interest and performance fee payable recognised in the Statement of comprehensive income is £40 million
(2015: £72 million). See Note 27 “Share-based payments” for further details.
116
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
14 Intangible assets
Accounting policy:
Fund management contracts, such as those acquired by the Group in connection with the acquisition of a subsidiary, are stated
at their fair value at the date of acquisition less accumulated amortisation and any impairment losses.
Amortisation is charged to the Statement of comprehensive income, included in operating expenses, on a straight-line basis over
the estimated useful life of the fund management contract, typically five to 10 years.
Goodwill is recognised on the acquisition of subsidiaries when the cost of acquisition exceeds the net assets acquired. Goodwill
is carried at cost less any accumulated impairment, and is assessed annually for impairment.
Fund management contracts
Opening cost
Closing cost
Opening accumulated amortisation
Charge for the year
Closing accumulated amortisation
Net book amount
Goodwill
Opening value
Closing value
Total
15 Other assets
Group
2016
£m
Group
2015
£m
33
33
23
7
30
3
Group
2016
£m
9
9
12
33
33
17
6
23
10
Group
2015
£m
9
9
19
Accounting policy:
Assets, other than those specifically accounted for under a separate policy, are stated at their cost less impairment losses. They are
reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the
asset’s recoverable amount is estimated based on expected discounted future cash flows. Any change in the level of impairment is
recognised directly in the Statement of comprehensive income.
Prepayments
Other debtors
Amounts due from subsidiaries
Total other assets
Of which: receivable in greater than one year
Group
2016
£m
Group
2015
£m
Company
2016
£m
2
66
–
68
37
4
50
–
54
21
–
22
4
26
17
Company
2015
(restated)
£m
–
13
4
17
5
At 31 March 2016, there were no amounts due that were past due or impaired (2015: nil) for Group or Company.
3i Group Annual report and accounts 2016
117
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
16 Loans and borrowings
Accounting policy:
All loans and borrowings are initially recognised at the fair value of the consideration received. After initial recognition, these are
subsequently measured at amortised cost using the effective interest method, which is the rate that exactly discounts the estimated
future cash flows through the expected life of the liabilities. Financial liabilities are derecognised when they are extinguished.
Loans and borrowings are repayable as follows:
Within one year
In the second year
In the third year
In the fourth year
In the fifth year
After five years
Principal borrowings include:
Group
2016
£m
Group
2015
£m
Company
2016
£m
Company
2015
£m
262
–
–
–
–
575
837
–
240
–
–
–
575
815
262
–
–
–
–
575
837
–
240
–
–
–
575
815
Rate Maturity
Group
2016
£m
Group
2015
£m
Company
2016
£m
Company
2015
£m
Issued under the £2,000 million note issuance programme
Fixed rate
€350 million notes (public issue)
£200 million notes (public issue)
£400 million notes (public issue)
5.625%
6.875%
5.750%
2017
2023
2032
Committed multi-currency facilities
£350 million
Total loans and borrowings
LIBOR+0.60%
2020
262
200
375
837
–
–
837
240
200
375
815
–
–
815
262
200
375
837
–
–
837
240
200
375
815
–
–
815
During the year, the maturity of the Company’s £350 million syndicated multi-currency facility was extended by one year to September
2020. The Company has the option to request a further one-year extension at the second year anniversary of the facility, which may be
granted at the discretion of each lender individually. The £350 million facility has no financial covenants.
All of the Group’s borrowings are repayable in one instalment on the respective maturity dates. None of the Group’s interest-bearing
loans and borrowings are secured on the assets of the Group.
The fair value of the loans and borrowings is £967 million (2015: £997 million), determined with reference to their published market
prices. The loans and borrowings are included in Level 1 of the fair value hierarchy.
Under AIFMD, the Group is required to calculate leverage in accordance with a set formula and disclose this to investors. In line with
AIFMD, leverage is 116% (2015: 117%) under the gross method and 116% (2015: 120%) under the commitment method.
118
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
17 Provisions
Accounting policy:
Provisions are recognised when the Group has a present obligation of uncertain timing or amount as a result of past events
and it is probable that the Group will be required to settle that obligation and a reliable estimate of that obligation can be made.
The provisions are measured at the Directors’ best estimate of the amount to settle the obligation at the balance sheet date and
are discounted to present value if the effect is material. Changes in provisions are recognised in the Consolidated statement of
comprehensive income for the period.
Opening balance
Charge for the year
Utilised in the year
Closing balance
Opening balance
Charge for the year
Utilised in the year
Closing balance
Group
2016
Property
£m
Group
2016
Redundancy
£m
Group
2016
Restructuring
£m
4
–
(2)
2
1
5
(1)
5
3
–
(2)
1
Group
2015
Property
£m
Group
2015
Redundancy
£m
Group
2015
Restructuring
£m
6
–
(2)
4
4
–
(3)
1
3
1
(1)
3
Group
2016
Total
£m
8
5
(5)
8
Group
2015
Total
£m
13
1
(6)
8
The provision for redundancy relates to staff reductions announced prior to 31 March 2016. Most of the provision is expected to be
utilised in the next year.
The Group has a number of leasehold properties whose rent and unavoidable costs exceed the economic benefits expected to be
received. These costs arise over the period of the lease, and have been provided for to the extent they are not covered by income from
subleases. The leases covered by the provision have a remaining term of up to four years.
18 Trade and other payables
Accounting policy:
Liabilities, other than those specifically accounted for under a separate policy, are stated based on the amounts which are
considered to be payable in respect of goods or services received up to the balance sheet date.
Amounts due to subsidiaries
Trade and other payables
Total trade and other payables
Of which: payable in greater than one year
Group
2016
£m
–
126
126
27
Group
2015
£m
Company
2016
£m
–
152
152
25
408
9
417
–
Company
2015
(restated)
£m
305
14
319
–
3i Group Annual report and accounts 2016
119
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
19 Issued capital
Accounting policy:
Ordinary shares issued by the Group are recognised at the proceeds or fair value received with the excess of the amount received
over nominal value being credited to the share premium account. Direct issue costs net of tax are deducted from equity.
Issued and fully paid
Ordinary shares of 7319⁄22p
Opening balance
Issued on exercise of share options and under employee share plans
Closing balance
2016
Number
2016
£m
2015
Number
972,453,819
207,625
972,661,444
719
–
719
971,803,122
650,697
972,453,819
2015
£m
718
1
719
During the year to 31 March 2016 the Company issued 53,035 ordinary shares for total cash consideration of £220,806 on the exercise
of executive share options for a price of 416.34 pence per share (being the market prices at the dates of grant in 2004 and 2005 of the
options, adjusted to reflect returns of capital and additional dividends). The Company issued 154,590 ordinary shares to the Trustee of
the 3i Group Share Incentive Plan for a total cash consideration of £762,225 at various prices from 432.97 pence to 556.33 pence per
share (being the market prices on the issue dates which were the last trading day of each month in the year). These shares were ordinary
shares with no additional rights attached to them and had a total nominal value of £153,359.
20 Own shares
Accounting policy:
Own shares are recorded by the Group when ordinary shares are acquired by the Company or by The 3i Group Employee Benefit
Trust. Own shares are deducted from shareholders’ equity. A transfer is made to retained earnings at their weighted average cost in
line with the vesting of own shares held for the purposes of share-based payments. The number of own shares held by the Trust and
the schemes are described in Note 27.
Opening cost
Awards granted and exercised
Closing cost
2016
£m
79
(25)
54
2015
£m
89
(10)
79
21 Capital structure
The capital structure of the Group consists of net debt, including cash held on deposit, long-term borrowings and shareholders’ equity.
The type and maturity of the Group’s borrowings are analysed further in Note 16. Capital is managed with the objective of maximising
long-term return to shareholders, whilst maintaining a capital base to allow the Group to operate effectively in the marketplace and
sustain the future development of the business.
Cash and deposits
Borrowings and derivative financial liabilities
Net cash/(debt)1
Total equity
Gearing (net debt/total equity)
Group
2016
£m
997
(837)
160
4,455
nil
Group
2015
£m
861
(815)
46
3,806
nil
Company
2016
£m
Company
2015
(restated)
£m
897
(837)
60
4,002
nil
735
(815)
(80)
3,444
2%
1 The above numbers have been prepared under IFRS and differ from the Investment basis as detailed in the Strategic report.
120
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
21 Capital structure continued
Capital constraints
The Group is generally free to transfer capital from subsidiary undertakings to the parent company subject to maintaining each
subsidiary with sufficient reserves to meet local statutory/regulatory obligations. No significant constraints have been identified
and the Group has been able to distribute profits in a tax-efficient manner.
The Group’s regulated capital requirement is reviewed regularly by the Board of 3i Investments plc, an investment firm that is regulated
by the FCA. The last submission to the FCA demonstrated a significant consolidated capital surplus in excess of the FCA’s prudential
rules. The Group’s capital requirement is updated regularly following approval of the Group’s Internal Capital Adequacy Assessment
Process (ICAAP) report by the Board of 3i Investments plc. The Group complies with the Individual Capital Guidance as agreed with the
FCA and operates with a significant regulatory capital surplus. The Group’s Pillar 3 disclosure document can be found on www.3i.com.
22 Interests in Group entities
Accounting policy:
The Company has controlling equity interests in, and makes loans to, both consolidated and fair valued Group entities. As an
investment entity, these subsidiaries are all held at fair value in the Company’s accounts. The net assets of these entities are deemed
to represent fair value. This accounting policy was updated in 2016; see Note 31 for further details.
Opening book value
Additions
Share of profits
Disposals and repayments
Fair value movements
Exchange movements
Closing book value
Opening book value
Additions
Share of profits
Disposals and repayments
Fair value movements
Exchange movements
Closing book value
1 Restated. See Note 31.
Details of significant Group entities are given in Note 30.
Company
2016
Equity
investments
£m
Company
2016
Loans and
receivables
£m
Company
2016
Total
£m
951
14
–
(104)
379
–
1,240
1,450
487
420
(449)
(401)
101
1,608
2,401
501
420
(553)
(22)
101
2,848
Company
2015
Equity
investments
(restated)1
£m
Company
2015
Loans and
receivables
(restated)1
£m
Company
2015
Total
(restated)1
£m
780
30
–
(52)
193
–
951
1,354
429
255
(601)
71
(58)
1,450
2,134
459
255
(653)
264
(58)
2,401
3i Group Annual report and accounts 2016
121
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
23 Operating leases
Accounting policy:
The Group leases its office space. Future minimum payments due under non-cancellable operating lease rentals are shown in the
table below.
Leases as lessee
Less than one year
Between one and five years
More than five years
Group
2016
£m
7
19
15
41
Group
2015
£m
Company
2016
£m
Company
2015
£m
7
20
17
44
–
–
–
–
–
–
–
–
The Group leases a number of its offices under operating leases. None of the leases include contingent rentals.
During the year to 31 March 2016, £5 million (2015: £5 million) was recognised as an expense in the Consolidated statement of
comprehensive income in respect of operating leases. There was no impact (2015: nil) on the Consolidated statement of
comprehensive income in respect of subleases, as the difference between future lease and sublease obligations was already provided
for in prior years (refer to Note 17). The total future sublease payments expected to be received under non-cancellable subleases are
£4 million (2015: £4 million).
24 Commitments
Accounting policy:
Commitments represent amounts the Group has contractually committed to pay third parties but do not yet represent a charge or
asset. This gives an indication of committed future cash flows. Commitments at the year end do not impact on the Group’s financial
results for the year.
Group
2016
due within
1 year
£m
Group
2016
due between
2 and 5 years
£m
Group
2016
due over
5 years
£m
Equity and loan investments
90
–
–
Group
2016
Total
£m
90
Group
2015
due within
1 year
£m
Group
2015
due between
2 and 5 years
£m
Group
2015
due over
5 years
£m
68
–
–
Group
2015
Total
£m
68
Company
2016
due within
1 year
£m
Company
2016
due between
2 and 5 years
£m
Company
2016
due over
5 years
£m
Company
2016
Total
£m
Company
2015
due within
1 year
£m
Company
2015
due between
2 and 5 years
£m
Company
2015
due over
5 years
£m
Company
2015
Total
£m
Equity and loan investments
68
–
–
68
24
–
–
24
The amounts shown above include commitments made by the Group and Company of £65 million (2015: £33 million) and £65 million
(2015: £15 million) respectively, to create warehouse facilities to support the creation of senior secured debt portfolios ahead of future
CLO fund launches. They also include a commitment made by the Group to invest £22 million (2015: nil) in a new CLO fund upon
launch. These commitments are due within one year.
Further details on these warehouses are detailed in Notes 12 and 25.
For commitments to Private Equity and Infrastructure funds managed and advised by the Group refer to pages 22 and 24, respectively.
Operating lease commitments are detailed in Note 23.
122
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
25 Contingent liabilities
Accounting policy:
Contingent liabilities are potential liabilities where there is even greater uncertainty, which could include a dependency on events
not within the Group’s control, but where there is a possible obligation. Contingent liabilities are only disclosed and not included
within the Statement of financial position.
Contingent liabilities relating to guarantees available to third parties in respect
of investee companies
Group
2016
£m
Group
2015
£m
Company
2016
£m
Company
2015
£m
–
14
–
14
The contingent liability at 31 March 2015 related to an investee company that was sold during the current financial year. The contingent
liability was eliminated on the date of disposal.
Other contingent liabilities
The Company has provided a guarantee to the Trustees of the 3i Group Pension Plan in respect of liabilities of 3i plc to the Plan. 3i plc
is the sponsor of the 3i Group Pension Plan. On 4 April 2012, the Company transferred eligible assets (£150 million of ordinary shares in
3i Infrastructure plc) as defined by the agreement to a wholly-owned subsidiary of the Group. The Company will retain all income and
capital rights in relation to the 3i Infrastructure plc shares, as eligible assets, unless the Company becomes insolvent or fails to comply
with material obligations in relation to the agreement with the Trustees, all of which are under its control. The fair value of the assets
held by this subsidiary at 31 March 2016 was £187 million (2015: £193 million).
3i has entered into warehouse arrangements in Europe and the US to support the creation of senior secured debt portfolios ahead of
future CLO fund launches. Whilst in the warehouse phase negative mark to market movements may trigger a margin call, at which point
3i is required to post additional capital or close the facility and crystallise market losses. The maximum additional capital that could be
required based on the amount invested at 31 March 2016 is £17 million (2015: £15 million) and further detail can be found in Note 29.
At 31 March 2016, there was no material litigation outstanding against the Company or any of its subsidiary undertakings.
26 Retirement benefits
Accounting policy:
Payments to defined contribution retirement benefit plans are charged to the Statement of comprehensive income as they fall due.
For defined benefit retirement plans, the cost of providing benefits is determined using the projected unit method with actuarial
valuations being carried out at each balance sheet date. Interest on the net defined benefit liability/asset, calculated using the
discount rate used to measure the defined benefit obligation, is recognised in the Consolidated statement of comprehensive
income. Re-measurement gains or losses are recognised in full as they arise in other comprehensive income.
A retirement benefit deficit is recognised in the Consolidated statement of financial position to the extent that the present value
of the defined benefit obligations exceeds the fair value of plan assets.
A retirement benefit surplus is recognised in the Consolidated statement of financial position where the fair value of plan assets
exceeds the present value of the defined benefit obligations limited to the extent that the Group can benefit from that surplus.
Retirement benefit plans
(i) Defined contribution plans
The Group operates a number of defined contribution retirement benefit plans for qualifying employees throughout the Group. The
assets of these plans are held separately from those of the Group. The employees of the Group’s subsidiaries in France are members of
a state managed retirement benefit plan operated by the country’s government. 3i Europe plc’s French branch is required to contribute
a specific percentage of payroll costs to the retirement benefit scheme to fund these benefits.
The total expense recognised in the Consolidated statement of comprehensive income is £3 million (2015: £3 million), which represents
the contributions paid to these defined contribution plans. There were no outstanding payments due to these plans at the balance
sheet date.
3i Group Annual report and accounts 2016
123
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
26 Retirement benefits continued
(ii) Defined benefit plans
The Group operates a final salary defined benefit plan for qualifying employees of its subsidiaries in the UK (“the Plan”). The Plan is
approved by HMRC for tax purposes and is operated separately from the Group and managed by an independent set of Trustees,
whose appointment is determined by the Plan’s documentation. The Plan is subject to UK funding regulations, which require the
Group and the Trustees to agree a funding strategy and contribution schedule where necessary.
Membership of the Plan has not been offered to new employees joining 3i since 1 April 2006. The Plan was closed to the future accrual
of benefits by members with effect from 5 April 2011, although the final salary link will be maintained on existing accruals. Members of
the Plan have been invited to join the Group’s defined contribution plan with effect from 6 April 2011. The defined benefit plan is a
funded scheme, the assets of which are independent of the Company’s finances and are administered by the Trustees. The Trustees
are responsible for managing and investing the Plan’s assets and for monitoring the Plan’s funding position. As the Plan is now closed
to future accrual, measures have been taken to de-risk the Plan through changes to its investment policy.
The valuation of the Plan has been updated on an IAS 19 basis by an independent qualified actuary as at 31 March 2016.
Employees in Germany and Spain are entitled to a pension based on their length of service. 3i Deutschland GmbH and the German
and Spanish branches of 3i Europe plc contribute to individual investment policies for their employees and have agreed to indemnify
any shortfall on an employee’s investment policy should it arise. The total value of these investment policies intended to cover pension
liabilities is £1 million (2015: £1 million) and the future liability calculated by German and Spanish actuaries is £21 million (2015: £20 million).
The amounts recognised in the Consolidated statement of financial position for the year and other comprehensive income for these
schemes are a £1 million expense (2015: £1 million expense) and a £2 million gain (2015: £7 million expense), respectively.
The amount recognised in the Consolidated statement of financial position in respect of the Group’s defined benefit plans is as follows:
Present value of funded obligations
Fair value of the Plan assets
Asset restriction
Retirement benefit surplus in respect of the Plan
Retirement benefit deficit in respect of other defined benefit schemes
2016
£m
789
(992)
71
(132)
20
2015
£m
846
(1,055)
73
(136)
19
A retirement benefit surplus is recognised in respect of the Plan on the basis that the Group is entitled to a refund of any remaining
surplus once all benefits have been settled in the expected course. The asset restriction relates to tax that would be deducted at
source in respect of a refund of the Plan surplus.
The amounts recognised in the Consolidated statement of comprehensive income in respect of the Plan are as follows:
Included in interest payable
Interest income on net defined benefit asset
Included in other comprehensive income
Re-measurement loss
Asset restriction
Total re-measurement loss and asset restriction
Total
2016
£m
2015
£m
(3)
12
(4)
8
5
(5)
11
(4)
7
2
The re-measurement loss recognised in the financial statements is £6 million (2015: £14 million loss). The remaining balance relates
to losses on our overseas schemes, as noted above.
124
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
26 Retirement benefits continued
Changes in the present value of the defined benefit obligation were as follows:
Opening defined benefit obligation
Interest on Plan liabilities
Re-measurement (gain)/loss:
– loss/(gain) from change in demographic assumptions
– (gain)/loss from change in financial assumptions
– experience gains
Benefits paid
Closing defined benefit obligation
Changes in the fair value of the Plan assets were as follows:
Opening fair value of the Plan assets
Interest on Plan assets
Actual return on Plan assets less interest on Plan assets
Employer contributions
Benefits paid
Closing fair value of the Plan assets
Contributions paid to the Plan are related party transactions as defined by IAS 24 Related party transactions.
The fair value of the Plan’s assets at the balance sheet date is as follows:
Equities
Corporate bonds
Gilts
Other
The Plan’s assets are all invested with Legal and General Investment Management in quoted and liquid funds.
The Plan’s assets do not include any of the Group’s own equity instruments nor any property in use by the Group.
Changes in the asset restriction were as follows:
Opening asset restriction
Interest on asset restriction
Re-measurements
Closing asset restriction
2016
£m
846
27
8
(16)
(5)
(71)
789
2016
£m
1,055
32
(25)
1
(71)
992
2016
£m
204
174
594
20
992
2016
£m
73
2
(4)
71
2015
£m
687
30
(2)
157
(3)
(23)
846
2015
£m
898
38
141
1
(23)
1,055
2015
£m
222
213
610
10
1,055
2015
£m
74
3
(4)
73
3i Group Annual report and accounts 2016
125
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
26 Retirement benefits continued
The principal assumptions made by the actuaries and used for the purpose of the year end valuation of the Plan were as follows:
Discount rate
Expected rate of salary increases
Expected rate of pension increases
Retail Price Index (RPI) inflation
Consumer Price Index (CPI) inflation
2016
3.5%
5.7%
3.3%
3.2%
2.2%
2015
3.3%
5.6%
3.2%
3.1%
2.1%
In addition, it is assumed that members exchange 25% of pension for lump sum at retirement on the conversion terms in place at
31 March 2016 with an allowance for the terms to increase in future. The duration of the Plan’s defined benefit obligation at the
accounting date was around 20 years.
The post-retirement mortality assumption used to value the benefit obligation at 31 March 2016 is 80% of the S1NA Light tables
allowing for improvements from 2003 in line with the CMI 2012 core projections with a long-term annual rate of improvement of 1.5%
(unchanged from 31 March 2015). The life expectancy of a male member reaching age 60 in 2036 (2015: 2035) is projected to be 33.6
(2015: 33.4) years compared to 31.3 (2015: 31.1) years for someone reaching 60 in 2016.
The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is:
Discount rate
Retail Price Index (RPI) inflation
Life expectancy
Impact on retirement benefit surplus
Change in assumption
2016
2015
Decrease by 0.1%
Increase by 0.1%
Increase by 1 year
Decrease by £10 million
Decrease by £7 million
Decrease by £15 million
Decrease by £12 million
Decrease by £11 million
Decrease by £16 million
The above sensitivity analysis is based on changing one assumption whilst all others remain constant. In practice this is unlikely to occur
and changes in some of the assumptions may be correlated.
Through its defined benefit plan the Group is exposed to a number of risks, the most significant of which are detailed below:
Asset volatility
Changes in bond yields
Inflation risk
Life expectancy
A fall in the value of the Plan’s assets may reduce the value of the defined benefit surplus and could affect the future
funding requirements. To reduce the volatility of the Plan’s assets, the Trustees have implemented an investment strategy
that reduces the Plan’s equity holdings by switching them to bonds over time. The Plan’s assets are also diversified across
different asset classes.
A decrease in corporate bond yields will increase the Plan’s IAS 19 defined benefit obligation. However, the Plan holds a
proportion of its assets in corporate bonds and so any increase in the defined benefit obligation would be partially offset
by an increase in the value of the Plan’s assets.
The Plan’s defined benefit obligations are linked to inflation, and higher inflation will lead to higher liabilities. The majority
of the Plan’s assets are either unaffected by or only loosely correlated with inflation, meaning that an increase in inflation
could reduce or eliminate the defined benefit surplus.
The Plan’s obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an
increase in the Plan’s defined benefit obligation.
As the Plan was closed to future accrual of benefits by members with effect from 5 April 2011, the Group ceased to make regular
contributions to the Plan in the year to 31 March 2012. The Group does not intend to make contributions in the next year.
The triennial actuarial funding valuation as at 30 June 2013 was completed in March 2014. The results of that valuation showed that the
Plan had an actuarial surplus of £1 million at 30 June 2013 and as a result the Group was not required to make contributions to the Plan
in respect of that valuation. The contingent asset arrangement entered into during FY2013, details of which are provided in Note 25,
remains in place. It is expected that the next triennial actuarial funding valuation exercise will be based on the financial position of the
Plan as at 30 June 2016.
During the year, the Group launched a programme to offer the Plan’s members flexibility in how they take their pension benefits
following the Government’s “Freedom and choice in pensions” changes announced in April 2014. This included the provision of
independent financial advice and a range of options for deferred and pensioner members.
126
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
27 Share-based payments
Accounting policy:
The Group has equity-settled and cash-settled share-based payment transactions with certain employees. Equity-settled schemes
are measured at fair value at the date of grant, which is then recognised in the Statement of comprehensive income over the period
that employees provide services, generally the period between the start of performance period and the vesting date of the shares.
The number of share options expected to vest takes into account the likelihood that performance and services conditions included
in the terms of the award will be met.
Fair value is measured by use of an appropriate model which takes into account the exercise price of the option (if any), the current
share price, the risk-free interest rate, the expected volatility of the share price over the life of the option and any other relevant
factors. In valuing equity-settled transactions, no account is taken of any vesting conditions, other than conditions linked to the
price of the shares of 3i Group plc. The charge is adjusted at each balance sheet date to reflect the actual number of forfeitures,
cancellations and leavers during the year. The movement in cumulative charges since the previous balance sheet is recognised in the
Statement of comprehensive income, with a corresponding entry in equity.
Liabilities arising from cash-settled share-based payment transactions are recognised in the Statement of comprehensive income
over the vesting period. They are fair valued at each reporting date. The cost of cash-settled share-based payment transactions
is adjusted for the forfeitures of the participants’ rights that no longer meet the plan requirements as well as for early vesting.
Share-based payments are in certain circumstances made in lieu of annual cash bonuses or carried interest payments. The cost of
the share-based payments is allocated either to operating expenses (bonuses) or carried interest depending on the original driver
of the award. Executive Director Long-Term Incentives are allocated to operating expenses.
The total cost recognised in the Statement of comprehensive income is shown below:
Share awards included as operating expenses1,2
Share awards included as carried interest1
Cash-settled share awards3
2016
£m
10
5
4
19
2015
£m
15
4
3
22
1 Credited to equity.
2 For the year ended 31 March 2016, £8 million is shown in Note 5 (2015: £15 million) and is net of a £2 million release from the bonus accrual.
3 Recognised in operating expenses and/or carried interest.
The features of the Group’s share schemes for Executive Directors are described in the Report of the Board on Directors’ remuneration
on pages 87 and 88. To ensure that employees’ interests are aligned with shareholders, a significant amount of variable compensation
paid to higher earning employees is deferred into shares that vest over a number of years. For legal, regulatory or practical reasons
certain participants may be granted “phantom awards” under these schemes, which are intended to replicate the financial effects of
a share award without entitling the participant to acquire shares. The carrying amount of liabilities arising from share-based payment
transactions at 31 March 2016 is £4 million (2015: £5 million).
For the share-based awards granted during the year, the weighted average fair value of those options at 31 March 2016 was 457 pence
(2015: 323 pence).
The main assumptions for the valuation of certain share-based awards with market conditions attached comprised:
Valuation methodology
Binomial and Monte Carlo models
Black Scholes
Share price
at issue
Exercise
price
Expected
volatility
564p
542p
–
–
32%
24%
Expected
option life
in years Dividend yield
3–4
3
–
3.6%
Risk free
interest rate
1.01%
1.00%
Expected volatility was determined by reviewing share price volatility for the expected life of each option up to the date of grant.
3i Group Annual report and accounts 2016
127
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
27 Share-based payments continued
Movements in share awards
Share-based awards have no exercise prices outstanding and the number of awards are as follows:
Outstanding at the start of the year
Granted
Exercised
Lapsed
Outstanding at the end of year
Weighted average remaining contractual life of awards outstanding in years
Exercisable at the end of the year
2016
Number
2015
Number
16,016,623
17,454,763
2,777,789
2,483,913
(6,744,192)
(3,141,620)
(396,448)
11,653,772
2.9
216,479
(780,433)
16,016,623
4.5
186,481
The weighted average market price at the date of exercise was 545 pence (2015: 426 pence).
Holdings of 3i Group plc shares
The Group has established an employee benefit trust and the total number of 3i Group plc shares held in this trust at 31 March 2016
was 16 million (2015: 24 million). Dividend rights have been waived on these shares. The total market value of the shares held in trust
based on the year end share price of 456 pence (2015: 482 pence) was £74 million (2015: £115 million).
28 Financial risk management
Introduction
A review of the Group’s objectives, policies and processes for managing and monitoring risk is set out in the Risk section on pages
27 to 35. This Note provides further detail on financial risk management, cross-referring to the Risk section where applicable, and
includes quantitative data on specific financial risks.
The Group is a highly selective investor and each investment is subject to an individual risk assessment through an investment approval
process. The Group’s Investment Committee is part of the overall risk management framework set out in the Risk section. The risk
management processes of the Company are aligned with those of the Group and both the Group and the Company share the same
financial risks.
Financial risks
Concentration risk
3i seeks to diversify risk through significant dispersion of investments by geography, economic sector, asset class and size as well as
through the maturity profile of its investment portfolio. Although 3i does not set maximum limits for asset allocation, it does have a
maximum exposure limit. This is detailed in the Investment policy on page 63 in the Corporate Governance section. Quantitative data
regarding the concentration risk of the portfolio across geographies can be found in the Segmental analysis in Note 1 and in the 25
large investments table on pages 146 and 147.
Credit risk
The Group is subject to credit risk on its unquoted investments, derivatives, cash and deposits. The Group’s cash and deposits are held
with a variety of counterparties with 86% of the Group’s surplus cash held on demand in AAA rated money market funds and 4% held in
deposit accounts with an initial notice period of greater than 90 days. The balance is held on short-term deposit with banks with a credit
rating of A- or higher.
The credit quality of unquoted investments, which are held at fair value and include debt and equity elements, is based on the financial
performance of the individual portfolio companies. The credit risk relating to these assets is based on their enterprise value and is
reflected through fair value movements. Where the portfolio company has failed or is expected to fail in the next 12 months, the
Group’s policy is to record a provision for the full amount of the loan. Further detail can be found in the Price risk – market fluctuations
disclosure in this Note and the sensitivity disclosure to changes in the valuation assumptions is provided in the valuation section of
Note 12.
Liquidity risk
The liquidity outlook is monitored weekly by management and regularly by the Board in the context of periodic strategic reviews of the
balance sheet. The new investment pipeline and forecast realisations are closely monitored and assessed against our vintage control
policy. These are noted in the risk mitigation section on page 33 of the Risk section. The table on the next page analyses the maturity
of the Group’s gross contractual liabilities.
128
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
28 Financial risk management continued
Financial liabilities (excluding foreign exchange contracts)
As at 31 March 2016
Gross commitments:
Fixed loan notes
Committed multi-currency facility
Carried interest and performance fees payable within one year
Acquisition related earn-out charges payable
Trade and other payables
Total
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Due more
than
5 years
£m
312
1
20
1
99
433
35
1
–
–
–
36
106
2
–
–
–
108
861
–
–
–
–
861
Total
£m
1,314
4
20
1
99
1,438
Gross commitments include principal amounts and interest and fees where relevant. Carried interest and performance fees payable
greater than one year of £85 million (2015: £72 million) have no stated maturity as they result from investment related transactions and
it is not possible to identify with certainty the timing of when the investments will be sold.
As at 31 March 2015
Gross commitments:
Fixed loan notes
Committed multi-currency facility
Carried interest and performance fees payable within one year
Acquisition related earn-out charges payable
Trade and other payables
Total
Due within
1 year
£m
Due between
1 and 2 years
£m
Due between
2 and 5 years
£m
Due more
than
5 years
£m
49
1
13
17
127
207
289
1
–
10
–
300
106
2
–
–
–
108
896
–
–
–
–
896
Total
£m
1,340
4
13
27
127
1,511
Forward foreign exchange contracts
At 31 March 2016, there were no forward foreign exchange contracts in place (2015: Gross amount receivable and payable for foreign
exchange contracts of £58 million; due within one year).
The Company disclosures are the same as those for the Group with the following exceptions; carried interest and performance fees
payable within one year is nil (2015: nil) and trade and other payables within one year is £417 million (restated 2015: £319 million).
Market risk
The valuation of the Group’s investment portfolio is largely dependent on the underlying trading performance of the companies within
the portfolio but the valuation and other items in the financial statements can also be affected by interest rate, currency and quoted
market fluctuations. The Group’s sensitivity to these items is set out below.
(i) Interest rate risk
Interest rate risk has primarily been managed through a reduction in gross debt since 2012. The direct impact of a movement in interest
rates is relatively small as the Group’s outstanding debt is fixed rate. The sensitivities below arise principally from changes in interest
receivable on cash and deposit.
An increase of 100 basis points, based on the closing balance sheet position over a 12 month period, would lead to an approximate
increase in total comprehensive income of £10 million (2015: £9 million increase) for the Group and £9 million income (2015: £8 million)
for the Company. In addition, the Group and Company have indirect exposure to interest rates through changes to the financial
performance and valuation of portfolio companies and valuation of debt management investments caused by interest rate fluctuations.
(ii) Currency risk
The Group’s net assets in euro, US dollar, Swedish krona, Indian rupee and all other currencies combined are shown in the table below.
This sensitivity analysis is performed based on the sensitivity of the Group’s net assets to movements in foreign currency exchange
rates assuming a 10% movement in exchange rates against sterling. The sensitivity of the Company to foreign exchange risk is not
materially different from the Group.
3i Group Annual report and accounts 2016
129
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
28 Financial risk management continued
The Group considers currency risk on specific investment and realisation transactions and has reduced hedging on a consolidated
basis over time. Further information on how currency risk is managed is provided on page 32.
As at 31 March 2016
Net assets
Sensitivity analysis
Assuming a 10% movement in exchange rates against sterling:
Impact on exchange movements in the Statement of
comprehensive income
Impact on the translation of foreign operations in other
comprehensive income
Total
As at 31 March 2015
Net assets
Sensitivity analysis
Assuming a 10% movement in exchange rates against sterling:
Impact on exchange movements in the Statement of
comprehensive income
Impact on the translation of foreign operations in other
comprehensive income
Total
Sterling
£m
1,364
Euro
£m
2,169
US
dollar
£m
726
Swedish
krona
£m
106
Indian
rupee
£m
53
Other
£m
Total
£m
37
4,455
n/a
n/a
n/a
Sterling
£m
1,271
n/a
n/a
n/a
193
5
198
Euro
£m
1,367
124
12
136
68
(2)
66
9
1
10
4
1
5
3
–
3
277
5
282
US
dollar
£m
990
Swedish
krona
£m
20
Indian
rupee
£m
71
Other
£m
87
Total
£m
3,806
75
(7)
68
10
1
11
3
3
6
7
1
8
219
10
229
(iii) Price risk – market fluctuations
The Group’s management of price risk, which arises primarily from quoted and unquoted equity instruments, is through the careful
consideration of the investment, asset management and divestment decisions at the Investment Committee. The Investment
Committee’s role in risk management is discussed further in the Risk section.
A 15% change in the fair value of those investments would have the following direct impact on the Statement of comprehensive income:
Group
At 31 March 2016
At 31 March 2015
Company
At 31 March 2016
At 31 March 2015 (restated)
Quoted
investment
£m
Unquoted
investment
£m
45
60
186
191
Quoted
investment
£m
Unquoted
investment
£m
45
50
165
162
Total
£m
231
251
Total
£m
210
212
130
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
29 Related parties and interests in other entities
The Group has various related parties stemming from relationships with limited partnerships managed by the Group, its investment
portfolio (including unconsolidated subsidiaries), its advisory arrangements and its key management personnel. In addition, the
Company has related parties in respect of its subsidiaries. Some of these subsidiaries are held at fair value (unconsolidated subsidiaries)
due to the treatment prescribed in IFRS 10.
Related parties
Limited partnerships
The Group manages a number of external funds which invest through limited partnerships. Group companies act as the general
partners of these limited partnerships and exert significant influence over them. The following amounts have been included in respect
of these limited partnerships:
Statement of comprehensive income
Carried interest receivable
Fees receivable from external funds
Statement of financial position
Carried interest receivable
Group
2016
£m
53
28
Group
2016
£m
87
Group
2015
£m
Company
2016
£m
Company
2015
£m
28
31
Group
2015
£m
33
53
–
28
–
Company
2016
£m
Company
2015
£m
87
33
In addition, the Group has invested in the 3i Global Income Fund. At 31 March 2016, the value of the investment was £52 million. The
Group received management fees of less than £1 million in the year (2015: nil).
Investments
The Group makes investments in the equity of unquoted and quoted investments where it does not have control but may be able to
participate in the financial and operating policies of that company. It is presumed that it is possible to exert significant influence when
the equity holding is greater than 20%. The Group has taken the investment entity exception as permitted by IFRS 10 and has not
equity accounted for these investments, in accordance with IAS 28, but they are related parties. The total amounts included for
investments where the Group has significant influence but not control are as follows:
Statement of comprehensive income
Realised profit over value on the disposal of investments
Unrealised profits on the revaluation of investments
Portfolio income
Statement of financial position
Unquoted investments
Group
2016
£m
4
(42)
37
Group
2016
£m
480
Group
2015
£m
Company
2016
£m
13
3
26
Group
2015
£m
560
4
(15)
12
Company
2016
£m
Company
2015
(restated)
£m
1
(14)
17
Company
2015
(restated)
£m
341
416
From time to time, transactions occur between related parties within the investment portfolio that the Group influences to facilitate the
reorganisation or refinancing of an investee company. These transactions are made on an arm’s length basis.
3i Group Annual report and accounts 2016
131
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
29 Related parties and interests in other entities continued
Advisory arrangements
The Group acts as an adviser to 3i Infrastructure plc, which is listed on the London Stock Exchange. The following amounts have been
included in respect of this advisory relationship:
Statement of comprehensive income
Realised profit over value on the disposal of investments
Unrealised profits on the revaluation of investments
Fees receivable from external funds
Performance fees receivable
Dividends
Statement of financial position
Quoted equity investments
Performance fees receivable
Group
2016
£m
Group
2015
£m
Company
2016
£m
Company
2015
£m
2
20
12
20
12
Group
2016
£m
277
20
–
46
12
45
12
2
20
–
–
12
–
46
–
–
12
Group
2015
£m
288
45
Company
2016
£m
Company
2015
£m
277
–
288
–
Subsidiaries
Transactions between the Company and its fully consolidated subsidiaries, which are related parties of the Company, are eliminated
on consolidation. Details of related party transactions between the Company and its subsidiaries are detailed below.
Management, administrative and secretarial arrangements
The Company has appointed 3i Investments plc, a wholly-owned subsidiary of the Company incorporated in England and Wales,
as investment manager of the Group. 3i Investments plc received a fee of £13 million (2015: £13 million) for this service.
The Company has appointed 3i plc, a wholly-owned subsidiary of the Company incorporated in England and Wales, to provide the
Company with a range of administrative and secretarial services. 3i plc received a fee of £69 million (2015: £145 million) for this service.
Other subsidiaries
The Company borrows funds from, and lends funds to certain subsidiaries and pays and receives interest on the outstanding balances.
The interest income that is included in the Company’s Statement of comprehensive income is £1 million (2015: £1 million) and the
interest expense included is nil (2015: nil). At 31 March 2016, there was no interest due to or from the Company (2015: nil).
Key management personnel
The Group’s key management personnel comprise the members of the Executive Committee and the Board’s non-executive Directors.
The following amounts have been included in respect of these individuals:
Statement of comprehensive income
Salaries, fees, supplements and benefits in kind
Cash bonuses
Carried interest and performance fees payable
Share-based payments
Acquisition related earn-out charges
Statement of financial position
Bonuses and share-based payments
Carried interest and performance fees payable within one year
Carried interest and performance fees payable after one year
Acquisition related earn-out charges payable within one year
Acquisition related earn-out charges payable after one year
Group
2016
£m
Group
2015
£m
5
3
21
6
1
5
4
17
5
4
Group
2016
£m
Group
2015
£m
16
12
33
–
–
14
5
21
10
8
Carried interest paid in the year to key management personnel was £3 million (2015: £3 million). Acquisition related earn-out charges
paid to key management personnel was £19 million (2015: £8 million).
132
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
29 Related parties and interests in other entities continued
Unconsolidated structured entities
The application of IFRS 12 requires additional disclosure on the Group’s exposure to unconsolidated structured entities.
The Group has exposure to a number of unconsolidated structured entities as a result of its investment activities across its Private
Equity, Infrastructure and Debt Management business lines. These structured entities fall into four categories, namely CLOs, debt
management warehouses, closed end limited partnerships (Private Equity and Infrastructure funds) and investments in certain
portfolio investments.
The nature, purpose and activities of these entities are detailed below along with the nature of risks associated with these entities
and the maximum exposure to loss.
CLO structured entities
The Group manages CLO vehicles as part of its Debt Management business. These funds predominantly invest in senior secured loans
and are financed by investors seeking credit rated, structured, investment returns.
The Group manages these funds in return for a management fee. The Group also typically invests into the equity tranche of these
funds. The Group’s attributable stakes in these entities are held at fair value, fees receivable are recognised on an accruals basis and
performance fees are accrued when relevant performance hurdles are met.
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Unquoted investments
Fee income receivable
Total
Carrying amount
Assets
£m
Liabilities
£m
154
7
161
–
–
–
Maximum
loss
exposure
£m
154
7
161
Net
£m
154
7
161
At 31 March 2015, the carrying amount of assets and maximum loss exposure of unquoted investments and fee income receivable
was £119 million and £7 million respectively. The carrying amount of liabilities was nil.
At 31 March 2016, the total CLO assets under management were £7.1 billion (2015: £6.5 billion). The Group earned distributions
of £31 million (2015: £16 million) and fee income of £33 million (2015: £30 million) during the year from CLO structured entities.
Warehouse structured entities
Ahead of future CLO fund launches, warehouse facilities are usually established to support the creation of senior secured debt
portfolios. These entities are financed by the Group along with the bank appointed to operate the warehouse facility. The Group makes
a commitment to the warehouse, typically taking the first loss position and is at risk for margin calls if the portfolio underperforms. The
Group’s attributable stakes in these warehouses are held at fair value.
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Unquoted investments
Total
Carrying amount
Assets
£m
Liabilities
£m
17
17
–
–
Maximum
loss
exposure
£m
17
17
Net
£m
17
17
At 31 March 2015, the carrying amount of assets and the maximum loss exposure of unquoted investments was £43 million. The
carrying amount of liabilities was nil.
The Group earned interest income of £4 million (2015: £6 million) during the year from warehouse structured entities.
Closed end limited partnerships
The Group manages a number of closed end limited partnerships, which are primarily Private Equity or Infrastructure focused, in return
for a management fee. The purpose of these partnerships is to invest in Private Equity or Infrastructure investments for capital
appreciation. Limited Partners, which in some cases may include the Group, finance these entities by committing capital to them
and cash is drawn down or distributed for financing investment activity.
The Group’s attributable stakes in these entities are held at fair value, fees receivable are recognised on an accruals basis and carried
interest is accrued when relevant performance hurdles are met.
3i Group Annual report and accounts 2016
133
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
29 Related parties and interests in other entities continued
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Carried interest receivable
Total
Carrying amount
Assets
£m
Liabilities
£m
87
87
–
–
Maximum
loss
exposure
£m
87
87
Net
£m
87
87
At 31 March 2015, the carrying amount of assets and the maximum loss exposure of carried interest receivable was £33 million.
The carrying amount of liabilities was nil.
At 31 March 2016, the total assets under management relating to these entities was £2.0 billion (2015: £2.2 billion). The Group earned
fee income of £28 million (2015: £31 million) and carried interest of £53 million (2015: £28 million) in the year.
Investments that are structured entities
The Group makes investments on behalf of itself and third-party funds that it manages, for capital appreciation purposes. In a small
number of cases, these investments fall under the classification of a structured entity as they are funds managed by the General Partner
under a limited partnership agreement.
The Group’s attributable stakes in these entities are held at fair value.
The risk and maximum exposure to loss arising from the Group’s involvement with these entities are summarised below:
Balance sheet line item of asset or liability
Unquoted investments
Total
Carrying amount
Assets
£m
Liabilities
£m
2
2
–
–
Maximum
loss
exposure
£m
2
2
Net
£m
2
2
At 31 March 2015, the carrying amount of assets and the maximum loss exposure of unquoted investments was £2 million. The carrying
amount of liabilities was nil.
At 31 March 2016, the total fair value of these investments, including stakes held by third parties was £28 million (2015: £33 million).
The Group recognised an unrealised movement of nil (2015: £1 million loss) from investments that are structured entities.
Regulatory information relating to fees:
Under AIFMD, 3i Investments plc acts as an Alternative Investment Fund Manager (“AIFM”) to 3i Group plc. In performing the activities
and functions of the AIFM, the AIFM or another 3i company may pay or receive fees, commissions or non-monetary benefits to or from
third parties of the following nature:
– Transaction fees: 3i companies receive monitoring and Directors’ fees from portfolio companies. The amount is agreed with the
portfolio company at the time of the investment but may be re-negotiated. Where applicable, 3i may also receive fees on the
completion of transactions such as acquisitions, refinancings or syndications either from the portfolio company or a co-investor.
Transaction fees paid to 3i are included in portfolio income.
– Payments for third-party services: 3i companies may retain the services of third-party consultants; for example, for an independent
director or other investment management specialist expertise. The amount paid varies in accordance with the nature of the service
and the length of the service period and is usually, but not always, paid/reimbursed by the portfolio companies. The payment may
involve a flat fee, retainer or success fee. Such payments, where borne by 3i companies, are usually included in portfolio income.
– Payments for services from 3i companies: One 3i company may provide investment advisory services to another 3i company and
receive payment for such service.
134
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
30 Subsidiaries and related undertakings
IFRS 10 has reduced the requirements for an entity to be classified as an accounting subsidiary and deems wider control, as opposed to
equity ownership, as the key determinant when identifying accounting subsidiaries. Under IFRS 10, if the Group is exposed to, or has
rights to, variable returns from its involvement with the investee and has the ability to affect these returns through its power over the
investee, then it has control and hence the investee is deemed an accounting subsidiary. This is inconsistent with the UK Companies
Act where voting rights are the key determinant when identifying accounting subsidiaries, with a larger than 50% holding of voting
rights resulting in an entity being classified as a subsidiary.
In addition, under the application of IFRS 10, 30 of the portfolio investments are considered to be accounting subsidiaries. As per the
investment entity exception under IFRS 10, these are all held at fair value with movements shown in the Statement of comprehensive
income. The largest 25 portfolio companies by fair value are detailed on pages 146 and 147. The combination of the table below and
that on pages 146 and 147 are deemed by the Directors to fulfil the IFRS 12 disclosure of material subsidiaries.
The Companies Act 2006 requires disclosure of certain information about the Group’s related undertakings and this is set out below.
Related undertakings are subsidiaries, joint ventures, associates and other significant holdings. In this context, significant means either
a shareholding greater than or equal to 20% of the nominal value of any class of shares or a book value greater than 20% of the
Group’s assets.
The Company’s related undertakings at 31 March 2016 are listed below.
Description
Subsidiaries
3i Holdings plc
3i Investments plc
3i plc
3i International Holdings
Investors in Industry plc
Mayflower GP Limited
3i Trustee Company Limited
3i Assets LLP
3i General Partner Limited
3i General Partner No 1 Limited
3i Corporation
3i Debt Management US LLC
3i DM US (SLF) LP
Country of
incorporation
or residence
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
US
US
US
3i Deutschland Gesellschaft für Industriebeteiligungen mbH
Germany
Gardens Nominees Limited
Gardens Pension Trustees Limited
Waterloo Trustee Company Limited
Palace Street II Sarl
3i DM GIF 2015 GP Limited
I.C.F.C Computers Limited
3i Debt Management Limited
3i Debt Management Investments Limited
Palace Street I Limited
3i Europe General Partner Limited
3i Europe plc
3i Nominees Limited
3i 96 Partners Nominees Limited
3i Europartners II GP Limited
3i PVLP Nominees Limited
3i EF3 GPA Limited
UK
UK
UK
Luxembourg
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Holding/share class
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
66.67% ordinary shares/
33.33% cumulative preference shares
100% ordinary shares
100% ordinary shares
100% partnership interest
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% partnership interest
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
30 Subsidiaries and related undertakings continued
3i Group Annual report and accounts 2016
135
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Description
3i EF3 GPB Limited
3i Group Investments LP
3i APTech Nominees Limited
3i APTech GP Limited
3i EF3 Nominees B Limited
3i EF3 Nominees A Limited
Mayflower LP
3i Osprey GP Limited
3i Investments GP Limited
3i IIF GP Limited
3i Nordic plc
3i GP 2004 Limited
3i Networks Finland Limited
3i Ademas LP
3i International Services plc
3i EFIV Nominees Limited
3i EFV Nominees A Limited
3i EFV Nominees B Limited
3i (Shanghai) Investment Holding Limited
3i US Holdings LLC
3i Technology Corporation
3i India Private Limited
3i Sports Media (Mauritius) Limited
3i Asia Limited
3i EFV GP Limited
3i EF4 GP Limited
3i srl
3i Infraprojects (Mauritius) Limited
3i Research (Mauritius) Limited
Nordrhein-Westfahlen Fonds VC GmBH
IIF SLP GP Limited
3i Buyouts 2010 A LP
3i Buyouts 2010 B LP
3i Buyouts 2010 C LP
GP CCC 2010 Limited
3i GC GP Limited
3i GP 2010 Limited
3i Growth Capital A LP
3i Growth Capital G LP
3i Growth Capital (USA) D L.P.
3i Growth 2010 LP
3i Growth USA 2010 LP
3i Growth Capital (USA) P L.P.
3i GC Holdings Ref 2 sarl
Country of
incorporation
or residence
UK
UK
UK
UK
UK
UK
Jersey
UK
UK
Jersey
UK
UK
UK
UK
UK
UK
UK
UK
Mauritius
US
US
India
Mauritius
Mauritius
UK
UK
Italy
Mauritius
Mauritius
Germany
UK
UK
UK
UK
UK
UK
UK
UK
UK
Jersey
UK
Jersey
Jersey
Holding/share class
100% ordinary shares
100% partnership interest
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% partnership interest
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% partnership interest
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
72.85% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
88.50% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
99.03% partnership interest
98.34% partnership interest
97.17% partnership interest
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% partnership interest
100% partnership interest
100% partnership interest
85% partnership interest
83.62% partnership interest
100% partnership interest
Luxembourg
71.77% ordinary shares
136
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
30 Subsidiaries and related undertakings continued
Description
3i GC Nominees A limited
3i GC Nominees B Limited
Ebrain 1 Limited
Ebrain 2 Limited
Ebrain 3 Limited
Strategic Investments FM (Mauritius) Alpha Limited
3i India Infrastructure B LP
3i Pan European Growth Capital 2005-06 LP
3i Asia Pacific 2004-06 LP
3i UK Private Equity 2004-06 LP
3i Pan European Buyout 2004-06 LP
3i 2004 GmbH & Co KG
3i General Partner 2004 GmbH
Pan European Buyouts Co-invest 2006-08 LP
Pan European Buyouts (Dutch) A Co-invest 2006-08 LP
3i U.S. Growth Partners L.P.
3i US Growth Corporation
Global Growth Co-invest 2006-08 LP
Pan European Growth Co-invest 2006-08 LP
Pan European Growth (Dutch) A Co-invest 2006-08 LP
Asia Growth Co-invest 2006-08 LP
3i GP 2006-08 Limited
Pan European Buyouts (Nordic) Co-invest 2006-08 LP
Pan European Growth (Nordic) Co-invest 2006-08 LP
3i Infocomm Limited
3i Buyouts 08-10 A LP
3i Buyouts 08-10 B LP
3i Buyouts 08-10 C LP
3i Growth 08-10 LP
GP CCC 08-10 Limited
3i GP 08-10 Limited
3i Growth (Europe) 08-10 LP
3i PE 2013-16A LP
3i PE 2013-16C LP
3i GP 2013 Limited
GP 2013 Ltd
3i BIFM Investments Limited
BIIF GP Limited
BEIF II Limited
BAM General Partner Limited
3i BIIF GP LLP
3i BEIF II GP LLP
Country of
incorporation
or residence
UK
UK
Jersey
Jersey
Jersey
Mauritius
UK
UK
UK
UK
UK
Germany
Germany
UK
UK
Jersey
USA
UK
UK
UK
UK
UK
UK
UK
Hong Kong
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Holding/share class
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
70.03% ordinary shares
100% partnership interest
80% partnership interest
100% partnership interest
80% partnership interest
78.80% partnership interest
100% partnership interest
100% ordinary shares
100% partnership interest
100% partnership interest
93.59% partnership interest
100% ordinary shares
100% partnership interest
100% partnership interest
100% partnership interest
100% partnership interest
100% ordinary shares
100% partnership interest
100% partnership interest
75% ordinary shares
99.67% partnership interest
98.34% partnership interest
96.74% partnership interest
98.67% partnership interest
100% ordinary shares
100% ordinary shares
98.67% partnership interest
100% partnership interest
100% partnership interest
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% ordinary shares
100% partnership interest
100% partnership interest
3i Group Annual report and accounts 2016
137
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Country of
incorporation
or residence
UK
UK
Mauritius
Luxembourg
UK
Jersey
Jersey
Singapore
UK
UK
UK
UK
UK
Sweden
UK
UK
Brazil
UK
UK
UK
Spain
Holding/share class
25% partnership interest
25% partnership interest
36.42% ordinary shares
36.42% ordinary shares
36.42% partnership interest
36.42% partnership interest
20% ordinary shares
24% ordinary shares
39% ordinary shares
38% ordinary shares
24% ordinary shares
34% ordinary shares
37% ordinary shares
33% ordinary shares
44% ordinary shares
27% ordinary shares
39% ordinary shares
32% ordinary shares
48% ordinary shares
27% ordinary shares
43% ordinary shares
30 Subsidiaries and related undertakings continued
Description
Associates
3i Growth Carry A LP
3i Growth Carry B LP
Strategic Investments FM (Mauritius) B Limited
3i GC Holdings Ref 1 sarl
3i Growth Capital B LP
3i Growth Capital E (USA) L.P.
3i Infrastructure plc
ACR Capital Pte Limited
AES Engineering
Pearl (AP) Group Limited
Avlar Bioventures Limited
Carter Thermal Industries Limited
ESG Capital 1 Limited
Osby Intressenter AB
Jake Holdings Limited
MDY Healthcare
Orange County FIP
Permali Gloucester Limited
Scandferries Holdings UK Limited
Tato Holdings Limited
Sortifandus S.L.
Joint ventures
The Group has no interests in any joint ventures.
138
3i Group Annual report and accounts 2016
Financial statements
Notes to the accounts
31 Company – Restatement of prior period information
During the year, the Company changed the accounting treatment for its Employee Share Option Trust (“ESOT”) and reviewed the
IFRS 10 accounting policy for its interests in Group entities and restated comparative information where relevant. These adjustments
had no impact on the Group reported results.
Management reviewed the accounting for its ESOT and concluded that it would be better reflected as a branch of the Company rather
than as an independent subsidiary. The impact of this change on the Company statement of financial position was to decrease interests
in Group entities by £5 million (2015: £5 million, 2014: £80 million) and decrease Treasury shares by £54 million (2015: £79 million,
2014: £89 million) and increase capital reserves by £49 million (2015: £74 million, 2014: £9 million).
Separately management reviewed the interests in Group entities in the Company’s financial statements. These entities were previously
held at cost or accounted for directly in the Company’s financial statements. For these entities held at cost, an amount has been
reclassified from other current assets to Interests in Group entities. In addition, some of these entities are now held at fair value in
accordance with IFRS 10 and IAS 27.
For those entities that were accounted for directly within the Company’s financial statements, the impact on the Company statement
of financial position of this revision, by significant line item, is to reduce quoted equity investments by £56 million (2015: £65 million,
2014: £16 million), unquoted equity investments by £42 million (2015: £81 million, 2014: £117 million), cash and cash equivalents by nil
(2015: nil, 2014: £1 million), and increase interests in Group entities by £99 million (2015: £43 million, 2014: £50 million) and equity by
£99 million (2015: £34 million decrease, 2014: £21 million).
For those entities that were held at cost, the impact on the Company statement of financial position of this revision, by significant line
item, is to increase interests in Group entities by £243 million (2015: £802 million, 2014: £429 million), reduce other current assets by
£343 million (2015: £329 million, 2014: £290 million) and increase the capital reserve within equity by £243 million (2015: £455 million,
2014: £33 million). The impact of these restatements is presented on a line by line basis below:
Impact on Company statement of financial position
As at 31 March 2015
As at 31 March 2014
As originally
reported
£m
Effect of
restatement
£m
Restated
presentation
£m
As originally
reported
£m
Effect of
restatement
£m
Restated
presentation
£m
Assets
Quoted equity investments
Unquoted equity investments
Interests in Group entities
Other non-current assets
Other current assets
Cash and cash equivalents
Other assets
Total assets
Liabilities
Trade and other payables
Current income tax
Other liabilities
Total liabilities
Equity
Capital reserve
Revenue reserve
Treasury shares
Other reserves
Total equity
399
1,163
1,561
–
341
735
33
4,232
(327)
–
(838)
(1,165)
1,400
90
–
1,577
3,067
(65)
(81)
840
5
(329)
–
–
370
8
(1)
–
7
495
(39)
(79)
–
377
334
1,082
2,401
5
12
735
33
4,602
(319)
(1)
(838)
(1,158)
1,895
51
(79)
1,577
3,444
258
1,283
1,735
–
303
605
10
4,194
(292)
–
(887)
(1,179)
1,368
85
–
1,562
3,015
(16)
(117)
399
4
(290)
(1)
–
(21)
(8)
–
–
(8)
63
(3)
(89)
–
(29)
242
1,166
2,134
4
13
604
10
4,173
(300)
–
(887)
(1,187)
1,431
82
(89)
1,562
2,986
3i Group Annual report and accounts 2016
139
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
31 Company – Restatement of prior period information continued
Impact on Company cash flow statement for the year ended 31 March 2015
Cash flow from operating activities
Proceeds from investments
Net distributions from subsidiaries
Carried interest and performance fees received
Operating expenses
Income taxes received
Other cash flows
Net cash flow from operating activities
Net cash flow from financing activities
Change in cash and cash equivalents
Opening cash and cash equivalents
Effect of exchange rate fluctuations
Closing cash and cash equivalents
As originally
reported
£m
Effect of
restatement
£m
Restated
presentation
£m
270
143
1
(44)
–
9
379
(237)
142
605
(12)
735
(34)
(11)
1
44
1
–
1
–
1
(1)
–
–
236
132
2
–
1
9
380
(237)
143
604
(12)
735
3i Group Annual report and accounts 2016
140
Financial statements
Independent Auditor’s report to
the members of 3i Group plc
Our opinion on the financial statements is unmodified
We have audited the financial statements of 3i Group plc (the “Parent Company”) and its subsidiaries (together, the “Group”) for the
year ended 31 March 2016 set out on pages 93 to 139. In our opinion:
– 3i Group plc’s Group financial statements and Parent Company financial statements give a true and fair view of the state of the
Group’s and of the Parent Company’s affairs as at 31 March 2016 and of the Group profit for the year then ended;
– the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as
adopted by the European Union (“IFRSs as adopted by the EU”);
– the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU as applied in
accordance with the provisions of the Companies Act 2006; and
– these financial statements have been prepared in accordance with the requirements of the Companies Act 2006, and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
What we have audited
We audited the Group and Parent Company financial statements of 3i Group plc for the year ended 31 March 2016 which comprise:
Group
Parent company
Consolidated statement of comprehensive
income for the year to 31 March 2016
Consolidated statement of financial position as at 31 March 2016
Consolidated statement of changes in equity
for the year to 31 March 2016
Consolidated cash flow statement for the year to 31 March 2016
Related notes 1 to 31 to the financial statements
Company statement of financial position as at 31 March 2016
Company statement of changes in equity
for the year to 31 March 2016
Company cash flow statement for the year to 31 March 2016
Related notes 1 to 31 to the financial statements
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the EU and, as
regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006.
Overview of our audit approach
Areas of audit focus
The following risks had the greatest effect on our overall strategy, on the allocation of resources on the audit, and on
directing the efforts of the audit team.
– Incorrect valuation of unquoted proprietary investments and resulting impact on the consolidated statement of
comprehensive income.
– Incorrect calculation of carried interest and resulting impact on the consolidated statement of comprehensive
income.
– Incorrect recognition of portfolio income and realised profits on disposal of investments.
The first two areas of focus are considered to be significant risks, consistent with the 2015 audit strategy.
– The Group is principally managed from one location in London. All core functions, including finance and operations,
are located in London. The Group operates nine international offices which are primarily responsible for deal
origination and investment portfolio monitoring.
– The Group comprises 69 consolidated subsidiaries and 43 investment entity subsidiaries. Monitoring and control
over the operations of these subsidiaries, including those located overseas, is centralised in London.
– The UK audit team audited all items material to the Group financial statements.
– Our audit tested 99% of the investment portfolio and 96% of carried interest accruals.
– Overall Group materiality of £44m (2015: £38m) which represents 1% of net assets.
– Any audit differences in excess of £2m (2015: £1.9m) are reported to the Audit and Compliance Committee.
– The incorrect recognition of portfolio income and realised profits on disposal of investments is included as an area of
audit focus. We have included this risk in 2016 as a number of the Group‘s investments have been realised or
re-financed during the period.
Audit scope
Materiality
What has changed
3i Group Annual report and accounts 2016
141
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Our assessment of areas of audit focus
We identified the risks of material misstatement described below as those that had the greatest effect on our overall audit strategy, the
allocation of resources in the audit and the direction of the efforts of the audit team. In addressing these risks, we have performed the
procedures below which were designed in the context of the financial statements as a whole and, consequently, we do not express any
opinion on these individual areas.
Area of audit focus
Group and parent company risk
Incorrect valuation of unquoted proprietary investments
and resulting impact on the consolidated statement of
comprehensive income
Refer to the Audit and Compliance Committee report
(pages 75 to 78); Significant accounting policies (pages 100
to 102); and Notes 10, 11 and 12 of the financial statements
(pages 110 to 114)
The proprietary investment portfolio comprises a number
of unquoted securities. In the consolidated statement of
financial position these are shown both as Investments
(which are held directly by consolidated subsidiaries of the
Group), and as Investments in investment entities (which are
typically limited partnerships and other holding structures).
The Group adopts a valuation methodology based on the
International Private Equity and Venture Capital Valuation
2012 (‘IPEV’) guidelines, in conformity with IFRS 13. Owing
to the unquoted and illiquid nature of these investments,
the assessment of fair valuation is subjective and requires a
number of significant and complex judgements to be made
by management. The exit value will be determined by the
market at the time of realisation and therefore despite the
valuation policy adopted and judgements made by
management, the final sales value may differ materially
from the valuation.
There is the risk that inaccurate judgements made in the
assessment of fair value, in particular in respect of; earnings
multiples, the application of liquidity discounts, calculation
of discount rates and the estimation of future maintainable
earnings, could lead to the incorrect valuation of the
unquoted proprietary investment portfolio. In turn, this
could materially misstate the value of the Investment
portfolio in the Statement of financial position, the Gross
investment return and Total return in the Consolidated
statement of comprehensive income and the Net asset
value per share.
There is also the risk that management may influence the
significant judgements and estimations in respect of
unquoted proprietary investment valuations in order to
meet market expectations of the overall Net asset value of
the Group.
Our response to the area of audit focus
Monitoring and control of the valuation process is exercised centrally by management in
London and therefore we have reflected this in our audit strategy whereby the London
based team perform all audit procedures. Our procedures extended to testing 99% of
the related amount.
We obtained an understanding of management’s processes and controls determining
the fair valuation of unquoted proprietary investments. This included discussing with
management the valuation governance structure and protocols around their oversight
of the valuation process and corroborating our understanding by attending Valuations
Committee meetings. We identified key controls in the process, assessed design
adequacy and tested operating effectiveness of those controls. This enabled us to rely
on controls over portfolio company and comparable company data used in the valuation
of unquoted investments.
We compared management’s valuation methodology to IFRS and the IPEV guidelines.
We sought explanations from management where there were judgements applied in
their application of the guidelines, and discussed their appropriateness.
With the assistance of our valuations specialists, we formed an independent range of
the key assumptions used in the valuation of a sample of unquoted investments within
both the private equity and debt management business lines, with reference to relevant
industry and market valuation considerations. We compared these ranges with
management’s assumptions, and discussed our results with both management and the
Valuations Committee.
With respect to unquoted investments in the private equity business line, on a sample
basis we corroborated key inputs in the valuation models, such as earnings and net debt
to source data. We also performed the following procedures on key judgements made
by management in the calculation of fair value:
– Assessed the suitability of the comparable companies used in the calculation of the
earnings multiples;
– Challenged management on the application of liquidity discounts to earnings
multiples, obtaining rationale and supporting evidence for adjustments made;
– Performed corroborative calculations to assess the appropriateness of discount
rates; and
– Discussed the adjustments made to calculate future maintainable earnings and
corroborated this to supporting documentation.
We verified the valuation of unquoted investments in the debt management business
line to broker quotes and other data from third party pricing sources used by
management in the calculation of fair value.
We checked the mathematical accuracy of the valuation models on a sample basis.
We recalculated the unrealised profits on the revaluation of investments impacting
the Consolidated statement of comprehensive income.
We discussed and understood the rationale for any differences between the exit prices
of investments realised during the year and the prior year fair value, to further verify the
reasonableness of the current year valuation models and methodology adopted by
management.
What we concluded to the Audit and Compliance Committee:
The valuation of the unquoted proprietary investment portfolio is considered appropriate and within an acceptable range of fair value. All valuations
tested have been measured and recognised in accordance with IFRS and the IPEV guidelines. Appropriate inputs to the valuations were used and we
identified no significant differences between the valuations calculated by management and the results of our testing. Based on our procedures
performed we had no matters to report to the Audit and Compliance Committee.
142
3i Group Annual report and accounts 2016
Financial statements
Independent Auditor’s report
Area of audit focus
Group and parent company risk
Incorrect calculation of carried interest and resulting
impact on the consolidated statement of comprehensive
income
Refer to the Audit and Compliance Committee report (page
75 to 78); and Notes 11 and 13 of the financial statements
(pages 111 and 115)
Carried interest receivable is an accrual of the share of the
profits from funds managed by the Group on behalf of third
parties. Carried interest payable is an accrual of amounts
payable to investment executives in respect of the returns
on successful investments. Carried interest payable is only
paid on realisation of investments.
Carried interest receivable and payable is calculated as a
percentage of the profits that would be achieved, if the
investments within each fund or scheme were realised at
fair value, subject to the relevant hurdle rates or
performance conditions being met.
Judgement is required in determining the fair value of the
investment portfolio (as described in the preceding risk
section) and therefore, whether hurdles or performance
conditions have been achieved.
There are multiple carried interest arrangements which
have been structured over multiple periods, include
different pools of investments and investment executives
may participate in more than one scheme. The process of
calculating carried interest receivable and payable relies on
manual calculations.
Due to the complexities inherent in the arrangements and
the manual nature of the recognition process, there is a risk
that the carried interest calculations are incorrectly
calculated or recognised in the wrong period.
What we concluded to the Audit and Compliance Committee:
Our response to the area of audit focus
Monitoring and control of the carried interest process is exercised centrally by
management in London and therefore we have reflected this in our audit strategy
whereby the London based team perform all audit procedures. Our procedures
extended to testing 96% of the related amount.
We obtained an understanding of management’s processes and controls for the
calculation of carried interest by performing walkthrough procedures and discussing
with management the governance structure and protocols around their oversight of the
carried interest arrangements. Given the manual nature of the calculation, although
controls were deemed to be designed effectively, we adopted a substantive approach
to our testing.
We agreed a sample of calculation methodologies to their respective terms and
conditions set out in the underlying agreements.
Our audit procedures on the fair value of the underlying investments are stated in the
above section. We performed analytical procedures comparing the performance of the
reference investments in each fund/scheme, taking into account the investment
realisations, to the related accruals in the financial statements.
On a sample basis we:
– Recalculated the returns on the fund/scheme to test that hurdles/performance
conditions had been met where carried interest was being accrued;
– Recalculated the carried interest accruals for mathematical accuracy and agreed the
investment fair values to our audit work on the fair value of the investment portfolio,
the fee rates to the relevant agreements and realised gains to our audit work on
realised profits;
– Determined the reasonableness of investment exit dates with reference to our audit
work on the fair value of the investment portfolio, and our understanding of the life
cycle of the relevant investments, and then compared this with the anticipated
payment dates used to discount the carried interest accrual; and
– Verified the resulting cash flows to award letters sent to investment executives and
bank statement payments.
Our year-end audit procedures did not identify any matters regarding the recognition of carried interest in accordance with IFRS. All calculations
tested have been performed in accordance with contractual terms. Based on our procedures performed we had no matters to report to the Audit
and Compliance Committee.
3i Group Annual report and accounts 2016
143
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Area of audit focus
Group only risk
Incorrect recognition of portfolio income and realised
profits on disposal of investments
Refer to the Audit and Compliance Committee report
(pages 75 to 78); Significant accounting policies (pages 100
to 102); and Notes 2 and 11 of the financial statements
(pages 105 and 111)
Realised profits originate from disposals of investments.
Realised profits are calculated as the difference between
the net proceeds and the investment’s fair value at the
beginning of the year.
Portfolio income is directly attributable to the return from
investments. This includes: dividends from investee
companies; income from the most junior ranked level of
CLO investments; and income from loans and receivables.
In general, the calculations are non-complex. However,
there is the risk that investment disposals may be
recognised before the significant risks and rewards of
ownership have been transferred to the buyer. In addition,
the calculation of portfolio income includes manual
interventions.
Our response to the area of audit focus
Monitoring and control of the portfolio income and realised profits on disposal of
investments is exercised centrally by management in London and therefore we have
reflected this in our audit strategy whereby the London based team perform all audit
procedures. Our procedures extended to testing 77% of the related amount.
We confirmed our understanding of the processes and controls around accounting for
portfolio income and realised gains by performing walkthroughs of the material
processes. We identified key controls in the process, assessed design adequacy and
tested operating effectiveness of those controls.
We performed detailed testing on a sample of portfolio income transactions to confirm
whether they had been appropriately recorded in the income statement. Our tests
involved:
– Agreeing dividends and income from the most junior ranked level of CLO capital to
third party support; and
– Recalculating interest income based on the terms of the underlying agreements.
For realised gains, on a sample basis, we:
– Analysed the contract and terms of the sale to determine whether the Group had met
the stipulated requirements, confirming that the net proceeds and therefore the
realised profit over opening value could be reliably measured; and
– Re-performed management’s calculations to determine mathematical accuracy and
confirmed the collection of the net proceeds by agreeing the cash receipt to bank
statements.
What we concluded to the Audit and Compliance Committee:
Our year-end audit procedures did not identify any matters regarding the recognition of realised profits on disposal of investments and portfolio
income. All transactions tested have been recognised in accordance with contractual terms and IFRS. Based on our procedures performed we had
no matters to report to the Audit and Compliance Committee.
The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for
each entity within the Group. Taken together, this enables us to form an opinion on the consolidated financial statements.
We take into account the size, risk profile, the organisation of the group and the effectiveness of group-wide controls, changes in the
business environment and other factors such as recent internal audit results when assessing the nature, timing and extent of the audit
work to be performed at each entity.
The investment portfolio balance is the most significant part of the Consolidated statement of financial position. Monitoring and
control over the valuation of investments is exercised by management centrally in London, and as such is audited wholly by the UK
based audit team. Monitoring and control over the operations of the other subsidiaries within the Group, including those located
overseas, is centralised in London. In all locations where the Group has operations, the UK based audit team audited all items material
to the Group financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the
audit and in forming our audit opinion.
Materiality
Materiality is defined as the magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be
expected to influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the
nature and extent of our audit procedures.
We determined materiality for the Group to be £44m (2015: £38m), which is 1% (2015: 1%) of net assets. We believe that net assets
provides us with a consistent year on year basis for determining materiality, and is the most relevant performance measure to the
stakeholders of the entity.
144
3i Group Annual report and accounts 2016
Financial statements
Independent Auditor’s report
Performance materiality
Performance materiality is the application of materiality at the individual account or balance level. It is set at an amount to reduce to an
appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, we set performance
materiality at 50% (2015: 50%) of our planning materiality, namely £22m (2015: £19m). This is at the lower end of a range of 50% to 75%. In
arriving at 50%, we considered the judgemental nature of the valuations in the Consolidated statement of financial position, the relative
value of transactions recorded in the other primary statements, and to ensure that total uncorrected and undetected audit differences
in all accounts did not exceed our materiality of £44m.
Reporting threshold
Our reporting threshold is defined as an amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit and Compliance Committee that we would report to them all uncorrected audit differences in excess of £2m
(2015: £1.9m), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view, warranted reporting
on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in light of other
relevant qualitative considerations in forming our opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the Group’s and the Parent Company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and
the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual
Report and Accounts to identify material inconsistencies with the audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the course of performing the
audit. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities Statement set out on pages 65 to 66, the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and
express an opinion on the financial statements in accordance with applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we
have formed.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
– the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act
2006; and
– the information given in the Strategic Report and the Corporate Governance Report for the financial year for which the financial
statements are prepared is consistent with the financial statements.
3i Group Annual report and accounts 2016
145
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Matters on which we are required to report by exception
ISAs (UK and Ireland)
reporting
We are required to report to you if, in our opinion, financial and non-financial information in the annual report is:
– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in
the course of performing our audit; or
– otherwise misleading.
In particular, we are required to report whether we have identified any inconsistencies between our knowledge
acquired in the course of performing the audit and the directors’ statement that they consider the annual report
and accounts taken as a whole is fair, balanced and understandable and provides the information necessary for
shareholders to assess the entity’s performance, business model and strategy; and whether the annual report
appropriately addresses those matters that we communicated to the audit committee that we consider should
have been disclosed.
We are required to report to you if, in our opinion:
– adequate accounting records have not been kept by the parent company, or returns adequate for our audit have
not been received from branches not visited by us; or
– the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not
in agreement with the accounting records and returns; or
– certain disclosures of directors’ remuneration specified by law are not made; or
– we have not received all the information and explanations we require for our audit.
We are required to review:
– the directors’ statement in relation to going concern, set out on page 66 and longer-term viability, set out on
page 31; and
– the part of the Corporate Governance Statement relating to the company’s compliance with the provisions of the
UK Corporate Governance Code specified for our review.
Companies Act 2006
reporting
Listing Rules review
requirements
Conclusion in respect of all matters on which we are required to report by exception:
We have no exceptions to report in respect of any of the responsibilities above.
Statement on the Directors’ Assessment of the Principal Risks that Would Threaten the Solvency
or Liquidity of the Entity
ISAs (UK and Ireland)
reporting
We are required to give a statement as to whether we have anything material to add or to draw attention to in
relation to:
– the directors’ confirmation in the annual report that they have carried out a robust assessment of the principal risks
facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;
– the disclosures in the annual report that describe those risks and explain how they are being managed or mitigated;
– the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s
ability to continue to do so over a period of at least twelve months from the date of approval of the financial
statements; and
– the directors’ explanation in the annual report as to how they have assessed the prospects of the entity, over what
period they have done so and why they consider that period to be appropriate, and their statement as to whether
they have a reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they
fall due over the period of their assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.
Conclusion
We have nothing material to add or to draw attention to in respect of the above.
Julian Young (Senior statutory auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
18 May 2016
Notes:
1. The maintenance and integrity of the 3i Group plc web site is the responsibility of the directors; the work carried out by the auditors does not involve
consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements
since they were initially presented on the web site.
2. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
146
3i Group Annual report and accounts 2016
Portfolio and other information
25 Large investments
The 25 investments listed below account for 79% of the portfolio at 31 March 2016 (2015: 81%). This table does not include two
investments that have been excluded for commercial reasons. For each of our investments we have assessed whether they classify as
accounting subsidiaries under IFRS and/or subsidiaries under the UK Companies Act. This assessment forms the basis of our disclosure
of accounting subsidiaries in the financial statements.
The UK Companies Act defines a subsidiary based on voting rights, with a greater than 50% majority of voting rights resulting in an
entity being classified as a subsidiary. IFRS 10 applies a wider test and, if a Group is exposed, or has rights to variable returns from its
involvement with the investee and has the ability to affect these returns through its power over the investee then it has control, and
hence the investee is deemed an accounting subsidiary. Accounting subsidiaries under IFRS 10 within the 25 large investments below
are noted. None of these investments are UK Companies Act subsidiaries.
In accordance with Section 29 of the Alternative Investment Fund Manager Directive (“AIFMD”), 3i Investments plc, as AIFM,
encourages all controlled portfolio companies to make available to employees and investors an Annual report which meets the
disclosure requirements of the Directive. These are available either on the portfolio company’s website or through filing with the
relevant local authorities.
Investment
Description of business
Action*
Non-food discount retailer
3i Infrastructure plc*
Quoted investment company,
investing in infrastructure
Scandlines*
Ferry operator between
Denmark and Germany
Weener Plastic*
Supplier of plastic packaging
solutions
Audley Travel*
Provider of experiential tailor
made travel
Mayborn*
Manufacturer and distributor of
baby products
ATESTEO (formerly GIF)*
International transmission testing
specialist
Q Holding*
Precision engineered elastomeric
components manufacturer
Christ*
Distributor and retailer of jewellery
AES Engineering
Manufacturer of mechanical seals
and support systems
Quintiles
Clinical research outsourcing
solutions
Business line
Geography
First invested in
Valuation basis
Private Equity
Benelux
2011
Earnings
Infrastructure
UK
2007
Quoted
Private Equity
Denmark/
Germany
2007/2013
DCF
Private Equity
Germany
2015
Earnings
Private Equity
UK
2015
Earnings
Private Equity
UK
2006
Imminent sale
Private Equity
Germany
2013
Earnings
Private Equity
US
2014
Earnings
Private Equity
Germany
2014
Earnings
Private Equity
UK
1996
Earnings
Private Equity
US
2008
Quoted
Residual
cost1
March
2015
£m
2
Residual
cost1
March
2016
£m
1
Valuation
March
2015
£m
592
Valuation
March
2016
£m
Relevant transactions
in the year
902
Refinancing returned
£168m of proceeds
302
270
481
464
£51m special dividend
following the sale of
Eversholt Rail
114
114
262
–
–
151
161
–
–
369
£46m of proceeds and
income, net of transaction
fees, following sale of route
between Helsingor and
Helsinborg
173 New investment
158 New investment
129
149
133
135
Exit announced in April
2016
68
83
78
130
Further investment of £11m
100
100
109
120
99
30
41
99
30
26
111
117
102
92
144
92
Partial disposal in the year
3i Group Annual report and accounts 2016
147
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Valuation
March
2015
£m
Valuation
March
2016
£m
Relevant transactions
in the year
54
61
80
64
71
47
–
53
43
–
47
53
22
40
87
Exit announced in April
2016
83
80
64
63
60
59 New investment
55
Refinancing returned
£17m of proceeds
53
52 New fund launched
44
Partial disposal in the year
42
37
36
Residual
cost1
March
2015
£m
30
Residual
cost1
March
2016
£m
30
159
159
2
65
65
2
70
65
117
124
–
69
22
–
30
53
48
87
52
55
23
48
23
53
48
93
1,632
2,029
2,647
3,567
Investment
Description of business
Amor*
Provider of affordable precious
jewellery
Mémora*
Funeral service provider
Tato
Manufacturer and sale of speciality
chemicals
Aspen Pumps*
Manufacturer of pumps and
accessories for the air conditioning,
heating and refrigeration industry
Dynatect*
Manufacturer of engineered,
mission critical protective
equipment
OneMed Group*
Distributor of consumable medical
products, devices and technology
Euro-Diesel*
Manufacturer of uninterruptible
power supply systems
Geka*
Manufacturer of brushes,
applicators and packaging systems
for the cosmetics industry
MKM
Building materials supplier
Global Income Fund*
Debt Management open ended
fund with exposure to North
American and western
European issuers
Refresco Gerber
European bottler of soft drinks
and fruit juices for retailers and
branded customers
Agent Provocateur*
Women’s lingerie and assorted
products
Polyconcept
Leader in promotional products
industry
Etanco*
Designer, manufacturer and
distributor of fasteners and
fixing systems
Business line
Geography
First invested in
Valuation basis
Private Equity
Germany
2010
Imminent sale
Private Equity
Spain
2008
Earnings
Private Equity
UK
1989
Earnings
Private Equity
UK
2015
Earnings
Private Equity
US
2014
Earnings
Private Equity
Sweden
2011
Earnings
Private Equity
Benelux
2015
Earnings
Private Equity
Germany
2012
Earnings
Private Equity
UK
2006
Earnings
Debt Management
UK
2007
Broker quotes
Private Equity
Benelux
2010
Quoted
Private Equity
UK
2007
Earnings
Private Equity
UK
2005
Earnings
Private Equity
France
2011
Earnings
* Controlled in accordance with IFRS.
1 Residual cost includes capitalised interest.
148
3i Group Annual report and accounts 2016
Portfolio and other information
Portfolio valuation – an explanation
Policy
The valuation policy is the responsibility of the Board, with
additional oversight and annual review from the Valuations
Committee. Our policy is to value 3i’s investment portfolio
at fair value and we achieve this by valuing investments on an
appropriate basis, applying a consistent approach across the
portfolio. The policy ensures that the portfolio valuation is
compliant with the fair value guidelines under IFRS and,
in so doing, is also compliant with the guidelines issued by the
International Private Equity and Venture Capital valuation board
(the “IPEV guidelines”). The policy covers the Group’s Private
Equity, Infrastructure and Debt Management investment
valuations. Valuations of the investment portfolio of the Group
and its subsidiaries are performed at each quarter end.
Fair value is the underlying principle and is defined as “the price
that would be received to sell an asset in an orderly transaction
between market participants at the measurement date” (IPEV
guidelines, December 2012). Fair value is therefore an estimate and,
as such, determining fair value requires the use of judgement.
The quoted assets in our portfolio are valued at their closing bid
price at the balance sheet date. The majority of the portfolio,
however, is represented by unquoted investments.
Private equity unquoted valuation
To arrive at the fair value of the Group’s unquoted Private Equity
investments, we first estimate the entire value of the company we
have invested in – the enterprise value. We then apportion that
enterprise value between 3i, other shareholders and lenders.
Determining enterprise value
The enterprise value is determined using one of a selection
of methodologies depending on the nature, facts and
circumstances of the investment.
Where possible, we use methodologies which draw heavily
on observable market prices, whether listed equity markets
or reported merger and acquisition transactions, and trading
updates from our portfolio.
As unquoted investments are not traded on an active market,
the Group adjusts the estimated enterprise value by a liquidity
discount. The liquidity discount is applied to the total enterprise
value and we apply a higher discount rate for investments where
there are material restrictions on our ability to sell at a time of
our choosing.
The table opposite outlines in more detail the range of valuation
methodologies available to us, as well as the inputs
and adjustments necessary for each.
Apportioning the enterprise value between 3i, other
shareholders and lenders
Once we have estimated the enterprise value, the following steps
are taken:
1. We subtract the value of any claims, net of free cash balances,
that are more senior to the most senior of our investments.
2. The resulting attributable enterprise value is apportioned to
the Group’s investment, and equal ranking investments by
other parties, according to contractual terms and conditions,
to arrive at a fair value of the entirety of the investment.
The value is then distributed amongst the different loan,
equity and other financial instruments accordingly.
3. If the value attributed to a specific shareholder loan investment
in a company is less than its carrying value, a shortfall is
implied, which is recognised in our valuation. In exceptional
cases, we may judge that the shortfall is temporary; to
recognise the shortfall in such a scenario would lead to
unrepresentative volatility and hence we may choose not
to recognise the shortfall.
Other factors
In applying this framework, there are additional considerations
that are factored into the valuation of some assets.
Impacts from structuring
Structural rights are instruments convertible into equity or cash
at specific points in time or linked to specific events. For example,
where a majority shareholder chooses to sell, and we have a
minority interest, we may have the right to a minimum return
on our investment.
Debt instruments, in particular, may have structural rights. In the
valuation, it is assumed third parties, such as lenders or holders
of convertible instruments, fully exercise any structural rights they
might have if they are “in the money”, and that the value to the
Group may therefore be reduced by such rights held by third
parties. The Group’s own structural rights are valued on the basis
they are exercisable on the reporting date.
Assets classified as “terminal”
If we believe an investment has more than a 50% probability of
failing in the 12 months following the valuation date, we value the
investment on the basis of its expected recoverable amount in
the event of failure. It is important to distinguish between our
investment failing and the business failing; the failure of our
investment does not always mean that the business has failed,
just that our recoverable value has dropped significantly. This
would generally result in the equity and loan components of our
investment being valued at nil. Value movements in the period
relating to investments classified as terminal are classified as
provisions in our value movement analysis.
Infrastructure unquoted valuation
The primary valuation methodology used for infrastructure
investments is the discounted cash flow method (“DCF”). Fair
value is estimated by deriving the present value of the investment
using reasonable assumptions of expected future cash flows and
the terminal value and date, and the appropriate risk-adjusted
discount rate that quantifies the risk inherent to the investment.
The discount rate is estimated with reference to the market
risk-free rate, a risk adjusted premium and information specific
to the investment or market sector.
Debt management valuation
The Group’s Debt Management business line typically invests in
traded debt instruments and the subordinated notes that it is
required to hold in the debt funds which it manages. The traded
debt instruments and the subordinated notes are valued using
a range of data including broker quotes if available, 3i internal
forecasts and discounted cash flow models, trading data where
available, and data from third-party valuation providers. Broker
quotes and trading data for more liquid holdings are preferred.
3i Group Annual report and accounts 2016
149
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Methodology
Description
Inputs
Earnings
(Private Equity)
Most commonly used
Private Equity valuation
methodology
Used for investments
which are profitable and
for which we can
determine a set of listed
companies and
precedent transactions,
where relevant, with
similar characteristics
Quoted
(Infrastructure/
Private Equity)
Imminent sale
(Infrastructure/
Private Equity)
Fund
(Infrastructure/
Private Equity/Debt
Management)
Specific industry
metrics
(Private Equity)
Discounted
cash flow
(Private Equity/
Infrastructure)
Broker quotes
(Debt Management)
Used for investments
in listed companies
Used where an asset is
in a sales process, a price
has been agreed but
the transaction has not
yet settled
Used for investments
in unlisted funds
Used for investments in
industries which have well
defined metrics as bases
for valuation – eg book
value for insurance
underwriters, or regulated
asset bases for utilities
Appropriate for
businesses with
long-term stable cash
flows, typically in
infrastructure
Used to value traded
debt instruments
Other
(Private Equity)
Used where elements
of a business are valued
on different bases
Earnings multiples are applied to the earnings of the
Company to determine the enterprise value
Earnings
Reported earnings adjusted for non-recurring items,
such as restructuring expenses, for significant corporate
actions and, in exceptional cases, run-rate adjustments
to arrive at maintainable earnings
Most common measure is earnings before interest,
tax, depreciation and amortisation (“EBITDA”)
Earnings used are usually the management accounts
for the 12 months to the quarter end preceding the
reporting period, unless data from forecasts or the
latest audited accounts provides a more reliable picture
of maintainable earnings
Earnings multiples
The earnings multiple is derived from comparable listed
companies or relevant market transaction multiples
We select companies in the same industry and, where
possible, with a similar business model and profile in
terms of size, products, services and customers, growth
rates and geographic focus
We adjust for relative performance in the set of
comparables, exit expectations and other company
specific factors
Closing bid price at balance sheet date
Contracted proceeds for the transaction, or best
estimate of the expected proceeds
Net asset value reported by the fund manager
We create a set of comparable listed companies
and derive the implied values of the relevant metric
We track and adjust this metric for relative performance,
as in the case of earnings multiples
Comparable companies are selected using the same
criteria as described for the earnings methodology
Long-term cash flows are discounted at a rate which is
benchmarked against market data, where possible, or
adjusted from the rate at the initial investment based
on changes in the risk profile of the investment
Broker quotes obtained from banks which trade the
specific instruments concerned, benchmarked to a
range of other data such as DCF, trade data and
other quotes
Values of separate elements prepared on one of the
methodologies listed above
% of
investment
basis portfolio
valued on this
basis
61%
Adjustments
A liquidity discount is
applied to the enterprise
value, typically between
5% and 15%, using
factors such as our
alignment with
management and other
investors and our
investment rights in
the deal structure
No adjustments
or discounts applied
A discount of typically
2.5% is applied to reflect
any uncertain
adjustments to expected
proceeds
Typically no further
discount applied in
addition to that applied
by the fund manager
An appropriate discount
is applied, depending on
the valuation metric used
Discount already implicit
in the discount rate
applied to long-term
cash flows – no further
discounts applied
No discount is applied
Discounts applied
to separate elements
as above
15%
5%
0%
3%
10%
5%
1%
For a small proportion of our smaller investments (less than 1% of the portfolio value), the valuation is determined by a more mechanical
approach using information from the latest audited accounts. Equity shares are valued at the higher of an earnings or net assets
methodology. Fixed income shares and loan investments are measured using amortised cost and any implied impairment, in line with IFRS.
Consistent with IPEV guidelines, all equity investments are held at fair value using the most appropriate methodology and no
investments are held at historical cost.
150
3i Group Annual report and accounts 2016
Portfolio and other information
Information for shareholders
Financial calendar
Ex-dividend date
Record date
Annual General Meeting*
Final dividend to be paid
Half-year results (available online only)
Interim dividend expected to be paid
Thursday 16 June 2016
Friday 17 June 2016
Thursday 30 June 2016
Friday 22 July 2016
November 2016
January 2017
* The 2016 Annual General Meeting will be held at The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE
on 30 June 2016 at 11.00am. For further details please see the Notice of Annual General Meeting 2016.
Information on ordinary shares
Shareholder profile: Location of investors at 31 March 2016
UK
North America
Continental Europe
Other international
Share price
Share price at 31 March 2016
High during the year (3 June 2015)
Low during the year (11 February 2016)
Dividends paid in the year to 31 March 2016
FY2015 Final dividend, paid 24 July 2015
FY2016 Interim dividend, paid 6 January 2016
Balance analysis summary
1–1,000
1,001–10,000
10,001–100,000
100,001–1,000,000
1,000,001–10,000,000
10,000,001–highest
Total
67.5%
19.6%
9.1%
3.8%
456p
570p
390p
14.0p
6.0p
%
0.67
1.64
2.10
11.53
36.06
48.00
100.0
Number of
holdings
individuals
Number of
holdings
Corporate
Bodies
Balance as at
31 March 2016
13,220
5,464
161
18
0
0
18,863
637
1,037
394
299
119
21
6,296,445
15,271,333
19,584,653
107,682,341
336,634,814
448,191,858
2,507 933,661,444
The table above provides details of the number of shareholdings within each of the bands stated in the register of members
at 31 March 2016.
3i Group Annual report and accounts 2016
151
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Boiler room and other scams
In the past, some of our shareholders have received unsolicited
telephone calls or correspondence concerning investment
matters from organisations or persons claiming or implying
that they have some connection with the Company. These are
typically from overseas based “brokers” who target UK
shareholders offering to sell them what often turn out to be
worthless or high risk shares in UK or overseas investments.
Shareholders are advised to be very wary of any unsolicited
advice, offers to buy shares at a discount or offers of free reports
into the Company. These approaches are operated out of what
is more commonly known as a “boiler room”. You may also be
approached by brokers offering to purchase your shares for an
upfront payment in the form of a broker fee, tax payment or
de-restriction fee. This is a common secondary scam operated
by the boiler rooms.
If you receive any unsolicited investment advice:
– Always ensure the firm is on the Financial Conduct Authority
(“FCA”) Register and is allowed to give financial advice before
handing over your money. You can check at www.fca.org.uk/
register;
– Double-check the caller is from the firm they say they are – ask
for their name and telephone number and say you will call them
back. Check their identity by calling the firm using the contact
number listed on the FCA Register. This is important as there
have been instances where an authorised firm’s website has
been cloned but with a few subtle changes, such as a different
phone number or false email address;
– Check the FCA’s list of known unauthorised overseas firms.
However, these firms change their name regularly, so even
if a firm is not listed it does not mean they are legitimate.
Always check that they are listed on the FCA Register; and
– If you have any doubts, call the Financial Conduct Authority
Consumer Helpline on 0800 111 6768. If you deal with an
unauthorised firm, you will not be eligible to receive payment
under the Financial Services Compensation Scheme.
Annual reports and half-yearly reports online
If you would prefer to receive shareholder communications
electronically in future, including annual reports and notices
of meetings, please visit our Registrars’ website at
www.shareview.co.uk/clients/3isignup and follow the
instructions there to register.
The 2016 half-yearly report will be available online only. Please
register to ensure you are notified when it becomes available
at www.3i.com/investor-relations/financial-news
More general information on electronic communications is
available on our website at www.3i.com/investor-relations/
shareholder-information
Investor relations and general enquiries
For all investor relations and general enquiries about 3i Group plc,
including requests for further copies of the Report and accounts,
please contact:
Investor relations
3i Group plc
16 Palace Street
London SW1E 5JD
Telephone +44 (0)20 7975 3131
email IRTeam@3i.com
or visit the Investor relations section of our website at
www.3i.com/investor-relations, for full up-to-date investor
relations information, including the latest share price, results
presentations and financial news.
Registrars
For shareholder administration enquiries, including changes
of address please contact:
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Telephone 0371 384 2031
Lines are open from 8.30am to 5.30pm, Monday to Friday
(international callers +44 121 415 7183).
152
3i Group Annual report and accounts 2016
Portfolio and other information
Glossary
Alternative Investment Funds (“AIFs”) At 31 March 2016, 3i
Investments plc as AIFM, managed five AIFs. These were 3i Group
plc, 3i Growth Capital Fund, 3i Eurofund V, 3i Global Income Fund
and the European Middle Market Loan Fund.
Board The Board of Directors of the Company.
Capital redemption reserve is established in respect of the
redemption of the Company’s ordinary shares.
Alternative Investment Fund Managers Directive (“AIFMD”)
became effective from July 2013. As a result, at 31 March 2016,
3i Investments plc is registered as an Alternative Investment Fund
Manager (“AIFM”), which in turn manages five AIFs.
Alternative Investment Fund Manager (“AIFM”) is the regulated
manager of AIFs. Within 3i, this is 3i Investments plc.
Approved Investment Trust Company This is a particular UK tax
status maintained by 3i Group plc, the parent company of 3i
Group. An approved investment trust company is a UK company
which meets certain conditions set out in the UK tax rules which
include a requirement for the company to undertake portfolio
investment activity that aims to spread investment risk and for
the company’s shares to be listed on an approved exchange.
The “approved” status for an investment trust must be agreed by
the UK tax authorities and its benefit is that certain profits of the
company, principally its capital profits, are not taxable in the UK.
Assets under management (“AUM”) A measure of the total
assets that 3i has to invest or manages on behalf of shareholders
and third-party investors for which it receives a fee.
Barclays Infrastructure Fund Management business (“BIFM”)
Acquired by 3i in November 2013 when it managed two active
unlisted funds that invest in UK and European PPP and energy
projects, with assets under management of over £700 million.
Base Erosion and Profit Shifting (“BEPS”) Project is an OECD
initiative that was launched in 2013, at the request of the G20
countries, to develop specific, detailed proposals, rules and
instruments required to equip governments and tax authorities to
address the BEPS challenge and the proposals were delivered to
and approved by the G20 leaders in November 2015. Countries
are now in the process of considering and implementing changes
to their domestic tax laws and international tax treaties to give
effect to the recommendations made by the BEPS project team.
Capital reserve The capital reserve recognises all profits that
are capital in nature or have been allocated to capital. Following
changes to the Companies Act, the Company amended its
Articles of Association at the 2012 Annual General Meeting to
allow these profits to be distributable by way of a dividend.
Carried interest is accrued on the realised and unrealised
profits generated taking relevant performance hurdles into
consideration, assuming all investments were realised at the
prevailing book value. Carried interest is only actually paid or
received when the relevant performance hurdles are met and
the accrual is discounted to reflect expected payment periods.
Carried interest receivable is generated on third-party capital
over the life of the relevant fund when relevant performance
criteria are met.
We pay carried interest to our investment teams on proprietary
capital invested and share a proportion of carried interest
receivable from third-party funds. This total carried interest
payable is provided historically by reference to two or three-year
vintages to maximise flexibility in resource planning.
“CLO” – Collateralised Loan Obligation A form of securitisation
where payments from multiple loans are pooled together and
passed on to different classes of owners in various tranches.
Common Reporting Standard (“CRS”) imposes obligations
on financial groups and entities to identify and report details,
relating to the foreign investors investing in such groups and
entities, to the local tax authority who then exchanges the
information with the other relevant tax authorities.
3i Group Annual report and accounts 2016
153
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Company 3i Group plc.
Country by Country reporting (“CbC Reporting”) refers to a
requirement for large multinational groups, operating in different
countries, to file an annual report detailing certain information
about the activities of the entities in the Group, on a country by
country basis, covering the countries in which the Group entities
operate. This new requirement will apply to the Group for its
accounting periods beginning after 1 April 2016.
Discounting The reduction in present value at a given date of
a future cash transaction at an assumed rate, using a discount
factor reflecting the time value of money.
Dividend income from equity investments and CLO capital is
recognised in the Statement of comprehensive income when the
shareholders’ rights to receive payment have been established.
Earnings before interest, tax, depreciation and amortisation
(“EBITDA”) EBITDA is defined as earnings before interest,
taxation, depreciation and amortisation and is used as the typical
measure of portfolio company performance.
EBITDA multiple Calculated as the enterprise value over EBITDA,
it is used to determine the value of a company.
Executive Committee The Executive Committee is responsible
for the day-to-day running of the Group and comprises: the Chief
Executive, Group Finance Director, the Managing Partners of the
Private Equity, Infrastructure and Debt Management businesses
and the Group’s General Counsel.
Fair value movements on investment entity subsidiaries The
movement in the carrying value of Group subsidiaries, classified
as investment entities under IFRS 10, between the start and end
of the accounting period converted into sterling using the
exchange rates at the date of the movement.
Fair value through profit or loss (“FVTPL”) is an IFRS measurement
basis permitted for assets and liabilities which meet certain criteria.
Gains and losses on assets and liabilities measured as FVTPL are
recognised directly in the Statement of comprehensive income.
Fee income is earned directly from investee companies when an
investment is first made and through the life of the investment.
Fees that are earned on a financing arrangement are considered
to relate to a financial asset measured at fair value through profit
or loss and are recognised when that investment is made. Fees
that are earned on the basis of providing an ongoing service to
the investee company are recognised as that service is provided.
Fees receivable from external funds are fees received by the
Group, from third parties, for the management of private equity,
infrastructure and debt management funds.
Foreign Account Tax Compliance Act (“FATCA”) is US tax
legislation aimed at preventing offshore tax avoidance by US
persons. The rules impose obligations on non-US financial groups
and entities to identify and report details relating to US investors
who have invested in those groups and entities.
Foreign exchange on investments arises on investments made
in currencies that are different from the functional currency of the
Group entity. Investments are translated at the exchange rate
ruling at the date of the transaction. At each subsequent
reporting date investments are translated to sterling at the
exchange rate ruling at that date.
Fund Management A segment of the business focused on
generating profits from the management of private equity,
infrastructure and debt management funds.
Fund Management Operating profit comprises fee income
from third parties as well as a synthetic fee received from the
Proprietary Capital business less operating expenses incurred
by the Fund Management business.
Gross investment return (“GIR”) includes profit and loss on
realisations, increases and decreases in the value of the
investments we hold at the end of a period, any income received
from the investments such as interest, dividends and fee income
and foreign exchange movements. GIR is measured as a
percentage of the opening portfolio value and is the principal
tool for assessing our Proprietary Capital business.
154
3i Group Annual report and accounts 2016
Portfolio and other information
Glossary
Income from loans and receivables is recognised as it accrues.
When the fair value of an investment is assessed to be below the
principal value of a loan the Group recognises a provision against
any interest accrued from the date of the assessment going
forward until the investment is assessed to have recovered
in value.
International Financial Reporting Standards (“IFRS”) are
accounting standards issued by the International Accounting
Standards Board (“IASB”). The Group’s consolidated financial
statements are required to be prepared in accordance with IFRS.
Investment basis Accounts prepared assuming that IFRS 10 had
not been introduced. Under this basis, we fair value portfolio
companies at the level we believe provides the most
comprehensive financial information.
The commentary in the Strategic report refers to this basis
as we believe it provides a more understandable view of our
performance.
Key Performance Indicators (“KPI”) is a measure by reference
to which the development, performance or position of the Group
can be measured effectively.
Money multiple is calculated as the cumulative distributions plus
any residual value divided by paid-in capital.
Net asset value (“NAV”) is a measure of the fair value of our
proprietary investments and the net costs of operating the
business.
Operating cash profit Defined as the difference between our
cash income (cash fees from managing third-party funds and cash
income from our proprietary capital portfolio) and our operating
expenses, excluding restructuring costs.
Operating profit Includes gross investment return, management
fee income generated from managing external funds, the costs of
running our business, net interest payable, movements in the fair
value of derivatives, other losses and carried interest.
Portfolio income is that which is directly related to the return from
individual investments. It is recognised to the extent that it is
probable that there will be economic benefit and the income can
be reliably measured. It is comprised of dividend income, income
from loans and receivables and fee income.
Proprietary Capital A segment of the business focused on
generating profits from shareholders’ capital which is available
to invest.
Proprietary Capital operating profit Comprises gross investment
return, operating expenses, a fee paid to the Fund Management
business and balance sheet funding expenses such as interest
payable.
Public Private Partnership (“PPP”) is a government service or
private business venture which is funded and operated through
a partnership of government and one or more private sector
companies.
3i Group Annual report and accounts 2016
155
Overview
Strategic report
Corporate Governance
Audited financial statements
Portfolio and other information
Realised profits or losses over value on the disposal of
investments The difference between the fair value of the
consideration received, less any directly attributable costs, on the
sale of equity and the repayment of loans and receivables and its
carrying value at the start of the accounting period, converted
into sterling using the exchange rates at the date of disposal.
Revenue reserve recognises all profits that are revenue in nature
or have been allocated to revenue.
Segmental reporting Operating segments are reported in a
manner consistent with the internal reporting provided to the
Chief Executive who is considered to be the Group’s chief
operating decision maker. All transactions between business
segments are conducted on an arm’s length basis, with intra-
segment revenue and costs being eliminated on consolidation.
Income and expenses directly associated with each segment
are included in determining business segment performance.
Share-based payment reserve is a reserve to recognise those
amounts in retained earnings in respect of share-based
payments.
Synthetic fee Internal fee payable to the Fund Management
business for managing our proprietary capital.
Total return Comprises operating profit less tax charge less
movement in actuarial valuation of the historic defined benefit
pension scheme.
Total shareholder return (“TSR”) is the measure of the overall
return to shareholders and includes the movement in the share
price and any dividends paid, assuming that all dividends are
reinvested on their ex-dividend date.
Translation reserve Comprises all exchange differences arising
from the translation of the financial statements of international
operations.
Underlying fund management profit Calculated as fee income
minus operating expenses related to Fund Management
activities, excluding restructuring and amortisation costs.
Unrealised profits or losses on the revaluation of investments
The movement in the carrying value of investments between the
start and end of the accounting period converted into sterling
using the exchange rates at the date of the movement.
Value weighted earnings growth The growth in last 12 month
earnings, when comparing to the preceding 12 months.
This measure is a key driver of our private equity portfolio
performance.
156
3i Group Annual report and accounts 2016
Notes
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Annual Report and accounts 2015 have
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3i Group plc
Registered office:
16 Palace Street
London SW1E 5JD
UK
Registered in England No. 1142830
An investment company as defined
by section 833 of the Companies Act 2006
3i Group plc
16 Palace Street, London SW1E 5JD, UK
Telephone +44 (0)20 7975 3131
THR27379
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